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While it’s impossible to say when the next stock market crash will come, it always pays to get ready for it in advance.
When share prices plunge, many investors lose their bearings. Some race to sell, but that’s usually a losing strategy, as all they do is crystallise their losses.
Personally, I prefer to buy shares when markets crash, as it means my favourite stocks are suddenly available at bargain prices. I think it’s a good opportunity to buy good, solid, reliable companies that are usually in demand and expensive as a result.
I like buying cheap stocks
In a crash, good companies often get sold off with the bad. Often, they are the first to recover too. In the interim, there’s my buying opportunity.
I’m keen to buy FTSE 100 spirits giant Diageo (LSE: DGE) but it looks too pricey for me today. A stock market crash could soon change that.
This is one of the best defensive stocks on the FTSE 100. People still find money to spend on booze in times of economic trouble, possibly even more than before.
Better still, Diageo has massive international diversification, operating in markets I barely knew existed. This means that if one part of the global economy struggles, the revenues keep rolling in from elsewhere.
Diageo is admired for its raft of top international brands such as Baileys, Guinness, Johnnie Walker, Smirnoff and Tanqueray. It also offers a host of lesser-known local brands too, in Nigeria, India, South Africa and beyond.
It is also making a splash at the luxury and pricey end of the drinks market, with its Premium-plus brands contributing 57% of reported net sales and 65% of organic net sales growth. A global recession could slow the rate of growth, or it even reverse it.
I think the biggest long-term risk is that alcohol falls out of fashion. A growing number of younger people don’t touch the stuff, and Diageo’s sales would dry up if the trend continues.
Timing the market is tricky
There are two things stopping me from buying Diageo today. The first is that the stock is expensive, trading at 23.9 times earnings, against the 15 times usually seen as fair value. The second is that its forecast yield is low at just 2.2% a year. That’s roughly half the forecast yield of 4.2% for the FTSE 100 as a whole.
Lately, I’ve been targeting dirt cheap FTSE 100 stocks with sky-high yields, and Diageo is the opposite of that. That’s fair enough. It’s a premium stock and I should expect to pay a premium price. Also, it has a great long-term track record of delivering both share price and dividend income growth.
Yet I would much rather buy it at a discounted price and with a higher yield, and that is only really likely to happen if we suffer a stock market crash. So I will bide my time and focus my energies on hoovering up those cheap dividend stocks I just mentioned. Then when the crash comes, I’ll pounce.
My strategy is far from infallible. I have no idea when the market will crash, and may have no money to invest when it does. Diageo may still be expensive. Ultimately, I might just have to pay full price for it. We’ll see.