Some Rules for Surviving a Market Crash

6/16 - "It is human psychology that leads us to believe that buying in a market where prices are up 300% is safer than buying when the market is down 80%. When markets are dramatically up there is a sense of confidence in the air, when the markets are severely down the confidence is replaced with fear...If we look at the past decade, many investors missed the chances to buy stocks following the .com crash, 9/11, Tsunami, SARS and now the credit crises. Many investors I knew felt more comfortable buying Pets.com stock at its height instead of buying Amazon (AMZN) when the Nasdaq crashed 80%.

In addition to my typical look at high cash, low debt, high ROE and high ROI, a few simple rules should be stuck to when buying during a market crash.

1) Stick to big names and blue chips stocks.
2) Find companies that have built irreplaceable business models, distribution, infrastructure, support networks and brand names.
3) Buy low and don’t be afraid to buy lower."

"Lets say you buy 10 blue chip stocks at a 50% discount. If 5 go out of business and 5 recover to original levels you break even. If you buy at a 60%, 70%, 80% or greater discount your hedge grows. At 80% off previous high’s, if you bought 10 stocks, 8 can go out of business and if 2 recover you will break even. The odds are squarely in your favor."