What should you do during a market crash?

A stock market crash is defined by equities declining 20% or more in a rapid downwards movement, and usually it's triggered by some event. A stock market correction is a quick drop between 10-20% in prices. When a market declines over a period in time it's called a bear market. If you experience a crash, correction, bear market, or small drop it's important to stay calm and these are my top tips on how to act and how to keep calm during a downturn, regardless of the severity of the event.

Tip #1: Don't Panic!

When the market drops, and everything turns red a lot of investors experience acute stress. It's time to take a deep breath and not panic sell your shares! If you own stocks and experience a double digit drop in your shares, this is the worst possible time to sell for a value investor. Revisit your company case / the answers in your checklist and remember why this is a Wonderful Business. After the financial crisis in 2008-09 some shares fell 50-70% only to quadruple in value over the next 5 years.

Tip #2: Get ready to buy: Revaluate your wonderful businesses and the checklist.

Do you have wonderful businesses on your wish list that you haven't been able to buy at a discount? My main focus when there's a crash is to buy wonderful businesses at a discount. I'm 100% focused and preparing to buy.

When the market falls, you'll want to check the most recent numbers in the annual reports and quarterly reports to make sure your valuation is up to date. Revisit your checklist because the next think you want to check is the risk factors - come up with scenarios to why this drop in the market will impact your business. For example, I made a mistake during the corona crisis and mis-calculated the impact on brick-and-mortar stores. Because I bought at a margin of safety (margin for errors) I came out absolutely alright, but I learned to evaluate risk factors. 

It's time to keep focused and cool and ensure that your case and your business will not be heavily impacted over the next 3 years (though it can be very difficult to predict, just use common sense).

Tip #3: Revisit your selling strategy.

If it's itching to sell go ahead and revisit your investing strategy - if it's like my strategy the first paragraph is "When to sell: Never".

Make sure that whenever you buy a business to create an exit strategy because during a downturn you can revisit the list assess the situation and most likely carry on doing nothing with your shares. 

You can read and be inspired by my selling strategy here: When should I sell my shares?

Tip #4: Focus on something else.

Keep yourself busy and focus on something else. Here are a few examples of what you can do. The main advice it to find something that will occupy your mind, so it doesn't drift. So, TV, social media, binge-eating and/or reading is probably not an option.

• If you have kids, a partner, or roommates: immerse yourself in a game that takes all your focus. 
• Call someone you love and give them praise or tell them something nice. Keep the conversation going - this will calm you down.
• Build an advanced LEGO set - the instructions will keep your mind on the build (yes, there are sets for adults). Several sports stars have mentioned that they build with LEGO bricks pre-game to destress.
• Play sports: ask some friends to go play ball. Ask your partner or kids to play for example a racket sport. A team sport will keep your eyes (and mind) on the ball. For some people a video or mobile game will keep the mind occupied.
• Learn something new. Maybe it's time you learned how to play piano, speak Spanish, or make a soufflé from scratch. Build a robot, a piece of furniture or take a car engine apart.

Tip #5 If failing in any or all of the above: forgive yourself.

We all make mistakes, and you'll make more mistakes in your life. You failed and now it's time to forgive yourself, reflect and learn. Write down what you've learned and be kind to yourself. Then get back on the horse smarter and stronger.