The stock market has been highly volatile this year. While the UK’s FTSE 100 index hasn’t taken too much of a hit to date, some areas of the market have been decimated. The tech-focused Nasdaq Composite index, for example, is down around 15% for the year, and is now not far off ‘bear market’ territory.
Has this volatility created a buying opportunity? I think it has. So I’ve been buying shares for my own portfolio over the last few weeks. Here’s a look at four reasons why.
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Huge share price falls
The first reason is that many stocks are well off their recent highs. This is particularly true in the tech sector where a lot of top companies are down 30% or more from their 52-week highs. A great example here is PayPal, which is one of the world’s biggest players in the electronic payments space. Its share price is currently down about 50% from its 2021 high.
That fall seems excessive, to my mind. When I’ve invested in high-quality companies after big drops in the past, I’ve generally been rewarded.
The second reason is that, after recent share price falls, valuations now look far more attractive. Going back to PayPal, it currently trades on a forward-looking P/E ratio of under 30. Not so long ago, it was trading on a P/E of around 60.
I think a P/E ratio of 30 for PYPL is very reasonable given the company’s track record, user base (400m+ users), and growth potential in today’s digital world. At that multiple, I see a lot of value on offer.
Another reason I’m buying now is that we’ve seen a fair bit of panic selling over the last week or so. On Monday, the Nasdaq Composite index was down nearly 5% at one stage, with many tech stocks down 10%, or more.
This kind of volatility indicates investors are in ‘fear’ mode. That’s a positive for a long-term investor like me, because I can take advantage of this fear. As Warren Buffett says, the best way to make money from stocks is to be ‘greedy’ when others are ‘fearful’.
The pros are buying
Finally, it’s worth noting that many professional money managers have been investing capital over the last week. I tend to watch a lot of fund manager interviews on CNBC and nearly all of the pros I’ve seen this week have said they’ve put some money to work in the recent market turbulence. The fact that the ‘smart money’ is buying now is very encouraging, to my mind.
How I’m buying shares
Of course, there’s every chance that stocks could fall further in the near term. I personally expect this volatility to last for a while, due to the uncertainty over interest rates.
Therefore, while I am buying shares now, I’m not going ‘all-in’ on stocks at the moment. Instead, I’m drip-feeding my cash into the market slowly, taking advantage of opportunities when I see them. I want to retain some cash on the sidelines, in case share prices go lower.