'What if the stock market crash?'

If you are interested enough in investing, and communicate this interest with your friends, some of the less understanding ones will often remark back, as their core defence against investing, 'What if the stock market crash?'.

Most of the time, investors will then try to find some reason able to get around that argument. However, be it wise, what the non-investors are saying is also very true. The stock market can crash at any given time, unexpected if you will, and cause many of your investments to lose some of their market capitalisation in a very short time.

However, for value investors, this shouldn't be a problem at all. Why I say so is because we(value investors) buy companies below intrinsic value. Also, when we buy a company, we look at how much free cash flow that is discounted that we can actually take from the company over its given life. Ironically, the sum of those free cash flows discounted back to the present over the companies life is its intrinsic value. So when we buy below intrinsic value, no matter what the stock market does, we are getting our money's worth and more.

There are two very important assumptions though. The first being, when we invest, we got to think as if we are buying the company as a whole. With that control power, we can determine the company's fate. With that said, we can take into control some of management's power and prevent that from making stupid mistakes which could destroy value in the company.

The second assumption is that we are looking from a businessman's perspective. The difference is a businessman will look at a viable business and based on informative decisions, decide whether he is going to buy the business or not, to some degree dependent on his business acumen. In Benjamin Graham's The Intelligent Investor, the last chapter cites that investing is most intelligent when it is most businesslike.

Of course, when we conduct a Discounted Cash Flow analysis to determine the free cash flows of the company over its remaining life, we got to be confident that what we discounted is truly its intrinsic value. Therefore, it pays to be conservative. Nobody though, can predict exactly what its true intrinsic value is because nobody can see the future except God. At best, our intrinsic value of the company is only a precise estimate.

So, when someone asks such a simple question as 'What if the stock market crashes?', I think we can either take our time to explain everything we know to these people, or alternatively, we can ignore them. It's your time, you choose what to do with it.