A stock market crash is not unique and in its history, there are multiple occasions when it looked like, it is the end of the market. But one thing which makes the stock market a beauty is that every time it bounced back with greater strength and made new highs.
To your surprise, the first-ever recorded market crash was in 1637, the tulip mania bubble, in which the price of bulbs of tulips reached extraordinarily high and then suddenly collapsed. Many market crashes were witnessed since then, the great depression (1929), Black Monday (1987), Dot-com bubble (2000), the Financial crisis (2008-09) etc.
This recent crash in the global stock market is due to multiple factors, the rapid spread of deadly coronavirus, geopolitical tensions, trade war and economic challenges. With the trends, it is quite unlikely that the market will stabilise or return to its glory days anytime soon.
So, as an investor, what should you do in such a time?
And, the answer is, just stay calm and patient. There is no need to sell your holdings if you’ve got a long term view and have invested in good business that generates real profits and attractive returns on equity. A stock market crash should be a non-issue for you.
Incidentally, it also turns out to be the best time to buy quality stocks at cheap valuations and continue adding to your portfolio. Let me present you an example, how Warren Buffett made a killing from the investments made during the 2008 financial crash.
Warren Buffett Investments in 2008 Financial Crash
Warren Buffett’s investment firm, Berkshire Hathaway purchased 120 million shares of Wells Farago and is up more than seven times since 2009 low. Investments in American Express are up by over 5 times.
The 2011’s deal to invest in $5 billion in preferred shares of Bank of America fetched him 6% annual dividend, or $300 million. And, another option to acquire 700 million common shares in the bank at an exercise price of just $7.14 each. This helped him to make a quick $12 billion and become the largest shareholder of the financial institution.
Another deal in Goldman Sachs, where Buffett bought $5 billion of preferred stock in the 2008 financial crisis, helped him to earn a profit of $3.7 billion in 2011 when Goldman Sachs redeemed the shares. And, 10 years after the crisis, Buffett still owns shares worth over $3 billion.
This was all about his investments in 2008. During 1988, not long after the Black Monday, Buffett invested in a stock that made him what he is today. The stock is Coca Cola, and he purchased 23.35 million shares worth $1.8 billion. By 1994, he increased his holding to 100 million shares. Till date, he has not sold a single share and at a current price of $51, it is worth around $21 billion. Further, Coca Cola pays a quarterly dividend of $0.4 per share, which brings it to an annual dividend income of $640 million. Since 1995, his total dividend income from Coca Cola stands at a whopping $7 billion.
How Indian Stock Market has Fared?
In respect to the Indian stock market, it is also a wealth generator for investors. Let’s check some stocks, how it has moved since the last financial crash in 2008.
Eicher Motors: During 2008, the stock plunged below Rs 150, but over the years, it has created a tremendous amount of wealth for investors. The stock has hit an all-time high of Rs 33,417 on Sept. 2017.
HDFC: The stock made low of Rs 222 in December 2008, and made a high of Rs 2,500 in Jan 2020.
Bajaj FinServ: During the crisis, the stock was trading at around Rs 90, and over the years, it has turned a multi-bagger. It made its all-time high of Rs 9,950 on 31st Jan 2020.
TCS: At the end of 2008, the price level fell to around Rs 100, which is quite unusual for such a company, but it created attractive valuations. And, over the year the stock hit an all-time high level is Rs 2,296.
You will find many such stocks, which has generated eye-boggling returns in the last 10 to 12 years period. And further, I’ve not included the dividend income from these stocks, which will make the real return even higher.
Let’s check with long-term equity mutual funds, how it has performed since the financial crash in 2008.
|NAV as on 1st Jan 2009||NAV as on 1st Jan 2020||Absolute Returns in %|
|SBI Bluechip Fund- Regular- Growth||Rs 7.69||Rs 41.59||440.83|
|ICICI Prudential Bluechip Fund - Regular- Growth||Rs 7.29||Rs 44.56||511.24|
|HDFC Top 100- Regular- Growth||Rs 116.24||Rs 617.36||431.10|
Every market crash creates an attractive valuation for stocks. And, through following Buffett’s way of investing “buying great companies at good prices”, you can succeed in wealth creation through investing in the stock market.
Therefore, in the event of a market crash, you should do the following things:
- At the time of the crash, don’t do a thing, and remain calm. Panic selling is the worst you can do to your investment portfolio.
- After the crash and wait for the market to stabilize. Assess the market condition and check how your portfolio has performed. If some investment didn’t work, replace them with better investment options.
- Don’t rush to make any major structural changes to your investment strategy. Understand the market, keep making gradual changes to allow your old losses to recover as much as possible. Eventually, you will be better off to handle such a situation through proper risk management.
Markets are always uncertain, and timing your investments is next to impossible. And, a market crash always opens up new opportunities, which you can use to your advantage.
You can also, read why you should not stop your SIP investments even in a bear market.