Why a Stock Market Crash Could Make You Richer

A game plan can help you react more logically during a downturn.

Historical data suggests that the S&P 500 currently trades at an extreme valuation.

Putting cash to work during a market crash could make you richer.

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The Shiller PE Ratio -- a valuation metric that measures the price of the S&P 500 against cyclically adjusted earnings from the previous 10 years -- currently sits at 39, the second-highest multiple in history. When was the Shiller PE ratio higher? Right before the dot-com bubble burst in 1999.

Of course, there is no single metric (or person) that can predict a stock market crash, at least not consistently. But no one can deny that the S&P 500 currently trades at a high valuation compared to its historical average. More to the point, the next market crash is always a question of when, not if. For that reason, every investor needs to learn how to navigate a downturn.

Here's the good news: the stock market has fallen many times before, and each of those events has ended with the market hitting new highs. That means downturns are often great buying opportunities, and if you have a game plan, you're more likely to act logically when the next market crash occurs.

Stressed investor pinching his brow, as he sits at his desk covered in financial charts.

How to prepare for a market crash

Different investors will have different strategies, and that's fine. Your personal comfort is one of the most important variables. If you can't sleep at night based on the way you've built your portfolio, you need to make some changes.

Personally, I like to keep a small cash position (maybe 5%) and a watchlist of stocks I plan to buy during the next downturn. Generally, I look for companies that have (at a minimum) these three qualities: a big market opportunity, a competitive advantage, and strong revenue growth. More importantly, I have researched every stock on the list, and I have long-term conviction in all of them -- some more so than others. But I would never buy a stock just because its price went down.

For instance, Snowflake (NYSE:SNOW) checks all three of my boxes.

Snowflake

Modern businesses generate a lot of data. But as the IT ecosystem has become more complex, managing and making sense of that data has become more difficult. As a workaround, businesses have attempted to deploy multiple point solutions, such as data lakes for storage, data warehouses for analytics, and data science tools for machine learning. But that strategy can make the problem worse, creating more data silos across different infrastructures.

So Snowflake does away with that complexity, unifying those workloads on a single platform. Its Data Cloud allows clients to integrate, analyze, and securely share data without worrying about the underlying infrastructure. That empowers business leaders to make more information decisions, and it allows developers to build data-driven applications.

Additionally, Snowflake's cloud-agnostic architecture -- meaning its platform can be deployed across all three major public clouds -- sets it apart from the likes of Amazon, Microsoft, and Alphabet's Google. With Snowflake, clients can work with the cloud vendor (or vendors) of their choosing, avoiding lock-in. In short, the company simplifies big data, and that value proposition has businesses throwing money at the platform.

In the second quarter, Snowflake grew its customer base 60% to 4,990. And it posted a retention rate of 169%, meaning the average customer spent 69% more over the past year. Powered by that stickiness, revenue surged 104% to $272 million. And remaining performance obligation (i.e. contracts not yet recognized as revenue) rocketed 122% to $1.5 billion, implying strong future sales growth.

On that note, management puts its market opportunity at $90 billion. Snowflake's revenue of $851 million over the last 12 months represents less than 1% of that figure -- but that should change in the future. The Data Cloud is clearly a sticky platform, and despite being founded in 2012, Snowflake is still growing at a tremendous pace. Moreover, the company has maintained a positive corporate culture throughout its rapid expansion, as evidenced by CEO Frank Slootman's 97% approval rating on Glassdoor.

That's why this growth stock looks like a smart buy under almost any circumstances, especially if the share price gets cut down by a market crash.