Here’s how I’d prepare for a stock market crash

Nobody knows what will happen in the stock market next week, let alone further ahead.

So when people say they expect a market crash or boom, they are making a forecast. Some such forecasts may turn out to be true in the end. But that is not possible to know ahead of time.

I therefore am uncertain what 2024 will bring in the stock market. What I do know, however, is that sooner or later we will see another market crash. Here is how I would get ready for it, whenever it eventually comes.

Focussing on valuation

I would like to build a portfolio that would hopefully suffer less in a crash than if I owned other shares.

So when looking for shares to buy, I focus carefully on valuation.

Some investors ignore valuation. Even if a hot share is overvalued, they figure, it can keep on going up if other investors want to buy it.

I see that as speculation not investment. I am not buying shares because I expect their price to move up in the short term. Rather, I am choosing ones I think currently trade at well below what I see as a fair price for them.

Getting ready to act

Valuation informs my approach to preparing for a crash.

At any one time, there are companies I like and would happily invest in. But their price makes me decide not to. If it came down to what I saw as an attractive level, I could make a move.

So I spend time to prepare a list of businesses in which I would like to invest, as long as I could buy their shares at the right price. If a market crash gives me a short-lived opportunity to do that, I want to be ready to act before the moment has passed.

An example of such a company is Judges Scientific (LSE: JDG).

The business buys up small and medium-sized makers of specialist instruments like those used in lab experiments. I see that as a market that is likely to benefit from enduring demand. Customers’ need for total precision means they are willing to pay a premium price for quality products.

That has helped Judges build a profitable business that has regularly grown its dividend. I do see some risks ahead. For example, logistics disruptions could push up the costs of transporting fragile instruments, eating into profits.

Overall, though, I like the look of the business. But so do many investors. The company’s price-to-earnings ratio of 73 is far too expensive for my tastes.

So I have added it my watchlist of stocks I would consider buying during the next market crash, if their prices fall enough.

The post Here’s how I’d prepare for a stock market crash appeared first on The Motley Fool UK.

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C Ruane has no position in any of the shares mentioned. The Motley Fool UK has recommended Judges Scientific Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.