A reader wants a crash playbook. Fortunately, markets have written one for us already.

This week’s question came from a reader called “A,” and it’s one I suspect plenty of investors are asking.

If a market correction is coming, what do you actually do?

Do commodities become the place to hide?

Does technology disappear for a while before roaring back?

Which sectors tend to hold up best?

And how do you separate businesses that deserve to be cheaper from those simply caught in the panic?

Before we get into that, it’s worth saying I don’t think we’re staring at another dot-com collapse.

The AI buildout is fundamentally different. (We’ll be talking about this in more detail during our YouTube Live event on 9 July at 3 pm GMT… you can set up a reminder here.)

Back then, investors were paying extraordinary prices for companies with little more than a website and a business plan. Today, the biggest names in AI are generating extraordinary amounts of cash while spending billions building real infrastructure.

Just look at Micron.

Quarterly revenue came in at US$41 billion against expectations of US$35 billion. Earnings landed at US$25 a share instead of the US$20 analysts expected. Demand from data centres continues to accelerate.

Those aren’t bubble numbers.

They’re the numbers of an industry still expanding.

That doesn’t mean markets can’t correct. They can. They always do. And plenty of smart investors think we’re overdue for one.

So rather than dismiss the question, let’s answer it.

Because if a proper tech sell-off does arrive, we don’t have to guess what might happen next.

History has already given us two remarkably clear case studies.

Both tell a similar story.

And both suggest the much-maligned Footsie can become surprisingly good armour when the music stops.

The sequel is never better than the original

Let’s start with the dot-com crash.

The FTSE 100 peaked just below 6,930 on 30 December 1999 before spending almost three years falling, losing roughly half its value from top to bottom.

The internet darlings were devastated.

Lastminute.com floated in March 2000 almost perfectly at the top of the mania. It quickly became the poster child for the era: a company worth billions despite barely making any money.

But the most instructive British casualty wasn’t a dot-com at all.

It was Marconi.

For decades the business had operated as GEC, Arnold Weinstock’s famously cautious industrial empire. It generated cash, owned dependable engineering businesses and was regularly criticised for being too conservative.

Then management changed.

The company rebranded as Marconi, sold many of its steady industrial operations and bet almost everything on telecommunications equipment just as the bubble reached its peak.

The shares climbed above £12 in August 2000.

What happened next is a lesson investors still shouldn’t ignore.

Then the tech and telecoms boom collapsed, demand vanished, and a business that had survived two world wars was all but wiped out in 18 months.

The lesson wasn’t that boring companies were suddenly exciting.

The lesson was that the biggest danger isn’t owning boring businesses. It’s paying exciting prices for exciting stories at exactly the wrong point in the cycle.

While the technology favourites were imploding, money quietly found a new home.

Bus companies. Brewers. Housebuilders. Oil majors. Tobacco firms.

The shares everyone dismissed as “old economy” not only held up better, they went on to lead the recovery.

One of Britain’s best-known value managers later admitted that 1999 was the worst period of his career. He sat near the bottom of every performance table while investors mocked him for owning breweries instead of dot-coms.

Eighteen months later, those same positions made him look like a genius.

Not because he’d suddenly become smarter.

Because when one investment story swallows an entire market, businesses producing real cash flow eventually become absurdly cheap. History has a habit of correcting that mistake.

The pattern showed up again two decades later.

I won’t spend long on 2008 because that was a systemic financial crisis. Everything was dragged lower.

But 2021 into 2022 looked much more like a classic growth unwind.

The profitless technology stocks. Meme shares. High-flying software names. Investment trusts packed with promises of tomorrow, like Scottish Mortgage.

As central banks began raising interest rates, the market rediscovered something it had briefly forgotten.

Profits matter.

Baillie Gifford’s flagship growth trust fell around 40% in a year.

Meanwhile, the supposedly tired old FTSE did something very few people expected.

While the S&P 500 fell 16% and the Nasdaq dropped 29% during 2022, the FTSE 100 finished roughly where it started, making it one of the best-performing major markets in the world.

Almost overnight, everyone stopped complaining that London was full of yesterday’s businesses.

The complaint that London was stuffed with old-economy dinosaurs disappeared in a hurry. BP and Shell rose more than 40% as energy prices surged. AstraZeneca gained 37%. British American Tobacco added nearly 29%. BAE Systems, the miners, National Grid and other defensive blue chips with pricing power did all the heavy lifting.

The average dividend yield on the FTSE sat around 3.7%, meaning investors were getting paid to wait.

The boring market didn’t just survive.

It won.

So, to answer “A” directly.

Yes, money rotated aggressively into commodities, energy and defensive businesses both times. Profitable companies with sensible balance sheets weathered the storm as investors looked for the safety of the old economy.

Yes, technology eventually came back.

But not quickly.

After the dot-com crash, the speculative end of the market stayed out of favour for years, and many of the biggest names never recovered. Cisco, the poster child of the era, only reclaimed its 2000 peak a few months ago.

Twenty-six years.

And yes, there are sectors that consistently hold up better when markets turn lower. Oil and gas. Mining. Tobacco. Pharmaceuticals. Utilities. Businesses selling products people continue buying whether markets are rising or falling.

But that’s not the real lesson.

The real lesson is why those sectors outperform.

When excitement disappears, investors stop paying for promises and start paying for cash flow. Businesses generating real profits suddenly become far more valuable than businesses promising profits one day.

That’s where the money is.

The Greggs-over-Tesla millionaires

The people who came through these periods wealthier were rarely the ones who perfectly called the top.

More often, they were ordinary investors who quietly owned good businesses and kept buying them whenever everyone else was selling.

Just look at Britain’s ISA millionaires.

There are now more than 5,000 of them, and the platforms that hold their accounts have told us exactly what they own .

The five most-held shares are Shell (LSE: SHEL.L), GSK (LSE: GSK.L), Legal & General (LSE: LGEN.L), National Grid (LSE: NG.L), and Lloyds Banking Group (LSE: LLOY.L) and Aviva  (LSE: AVVIY.L).

Oil, drugs, insurance, electricity.

AJ Bell Head of Markets said that more of their ISA millionaires hold Greggs than hold Tesla.

Lord Lee became the first publicly known ISA millionaire back in 2003, and he got there starting with as little as £80 a month, drip-fed into unfashionable dividend payers, every payout reinvested.

Jane Perry, now in her seventies, started with BT Group (LSE: BT.L) shares in the 1980s privatisations, kept going through every wobble, and her pot is past a million too.

None of these people had the Midas touch. They had patience, persistence, and a plan and they had income.

That is the whole game.

Own profitable businesses making things people actually need. Spread your risk widely enough that one blow-up doesn’t sink the portfolio. And when the market finally does crack, don’t treat it as a reason to panic. Treat it as the rare moment quality goes on sale at prices you may not see again for years.

Which brings me to the practical question.

If we do get a proper correction, what should you actually be looking for?

The basics that always ring true:

  • Real profits, not a promise of profits in 2030.
  • Fat margins, because margin is the buffer that carries a company through a lean year.
  • Low debt, because debt is what turns a correction into a death sentence, just ask Marconi.
  • And a product with genuine demand waiting on the other side of the dip.

The best businesses get sold alongside the worst ones during a panic.

That’s the opportunity.

Eventually, the cream rises back to the top because cash flows have a habit of winning.

Now, don’t mistake this for an argument to dump technology altogether.

Amazon lost more than 90% after the dot-com crash before becoming one of the greatest businesses ever built.

Nvidia listed in 1999. Split-adjusted, the shares climbed from around four cents to more than 60 cents before collapsing back to roughly seven cents in 2002. At the time, few would have imagined it would become one of the world’s most valuable companies.

The lesson isn’t to abandon the theme.

It’s to own the businesses making real money today and keep enough cash aside that, if markets do fall apart, you’re buying quality instead of being forced to sell it.

Corrections rarely destroy investors on their own.

Selling great businesses at the bottom usually does.

If the crash “A” is worried about arrives, don’t try to be cleverer than everyone else.

Be calmer.

Own profitable businesses. Keep buying them when they’re cheap. And when pessimism is at its peak, start adding to the companies you believe will define the next decade.

Personally, I don’t think we’re there yet.

For now, I’d still rather own the businesses building the AI economy than sit on the sidelines waiting for a crash that may not arrive. Compute. Inference. Memory. Storage. Connectivity. Engineering. Semiconductors. Power. Energy.

There’s still plenty to like.

Just don’t let the fear of missing the next crash become the reason you miss the next opportunity.

Until next time,

Sam Volkering
Investment Director, Southbank Investment Research

PS This is exactly the sort of discussion Nick Hubble and I’ll be having at our live event on 9 July. 

One reader asked where we’d put £10,000 to work today. The answer depends entirely on how you think the next few years unfold.

If you’re worried about a correction, bring your questions. If you’re trying to identify the next Micron or SanDisk before everyone else does, we’ll cover that too.

We’ll look at what’s happening in the market, where the biggest opportunities are emerging, and what comes next.