With sticky inflation, jammed supply chains, deeply inverted yield curves, and tough talk from Federal Reserve officials, there's certainly no shortage of reasons to anticipate a recession in 2023. This doesn't necessarily mean a market meltdown is imminent, but it's important to know what to do -- or, to the point of today's topic, what not to do -- when equities prices are in free fall.
With the following three guidelines, I'll ask you to do the opposite of what feels natural, and of course that's easier said than done. Still, exercising restraint when your screen is lit up with red digits can help prevent unnecessary financial loss now and regret later on.
1. Sell even though your thesis hasn't changed
Here's a challenge: Find a time when a major stock market index such as the S&P 500, Dow Jones Industrial Average, or Nasdaq-100 fell but didn't eventually recover. That's an impossible task as the stock market always returns to breakeven sooner or later. It might feel like stocks will never turn around during a market crash, however.
What's true of the major indexes is also generally the case with famous individual names that have stood the test of time. Granted, there are former giants like Sears, Radio Shack, and Toys R Us that never recovered. This raises a crucial question investors should ask themselves when their stocks are crashing along with the broader markets: Has my thesis on these businesses actually changed? Are these companies really the next Sears or Radio Shack, or are they only falling along with the markets?
A prime example would be Advanced Micro Devices. The tech rout of 2022 brought AMD stock down to the $50s, but that was more a function of monetary policy tightening fears than anything specific to Advanced Micro Devices. As it turned out, AMD knocked it out of the park in fiscal 2022 with a 63% increase in data center revenue and an 86% improvement in operating income. Investors who remembered their thesis -- what inspired them to buy the shares in the first place -- and kept their cool nearly doubled their investment from bottom to top, and there may be further upside ahead for AMD stock this year.
2. Obsess over price instead of value
To adapt an old Warren Buffett quote, price is what you pay but value is what you actually get. If you want to get Buffett-like results, spend less time during a market crash staring at the red digits on your screen and more time considering whether there are good values to take advantage of.
Most likely, there will be at least a handful of undervalued stocks during a full-on market crash. A good value isn't defined by any particular metric, but screening for mega caps with low price-to-earnings, price-to-book, and price-to-sales ratios compared to their peers isn't a bad way to start.
Moreover, you'll want to keeps tabs on the value propositions of any assets you already own. This circles back to the question of whether your original thesis has changed; if a company still has strong growth prospects based on a track record of delivering results (the meaning of this varies according to the company and sector), then its shares could still be a good value. Indeed, a stock might actually be a better value at a reduced price during a market crash -- meaning it may be time to add to your position, not reduce it.
3. Rely on financial social media for comfort or guidance
There's nothing inherently wrong with sharing stock-related ideas and engaging in finance-focused conversations on Twitter, StockTwits, Facebook groups, and so on. It's actually not a bad way to gauge retail-crowd sentiment at any given moment.
Relying on social media for ideas and inspiration during a market crash is usually inadvisable, however. By and large, you'll encounter overheated discussions and doomsday predictions on individual stocks as well as on the markets as a whole.
Again, you can revisit the tech wreck of 2022 for a textbook example. If you had followed the panicky recommendations of social-media denizens in October, you would have ended up selling AMD stock at $55, Apple stock at $125, and Nvidia stock at $112. Afterward, you would have been left with deep regret and a slimmer capital account. So, instead of succumbing to the madness of digital crowds during a market downturn, stay calm and rely on your own research and common sense.
