Stock markets remain extremely volatile as worries about super inflation and economic growth mount. But while lots of nervous investors are selling out during this bear market, I’m out there looking for bargains.
Billionaire investor Warren Buffett said it best when he declared it was a good time “to be greedy when others are fearful”. The idea is to buy low and watch the value of your investments soar when the market recovery kicks in.
What the expert says
But adopting a contrarian strategy can be very dangerous without taking due care and attention. Tim Bennett, head of education at investment firm Killik & Co, outlines three rules investors can use to maximise their returns:
#1: “Do your homework”
Going against the crowd isn’t just about doing the opposite to everyone else. Sometimes the crowd is right by heavily selling for good reason, Bennett says. And so “simply buying up inferior quality stocks that are being sold off for valid reasons isn’t a clever idea.”
Bennett notes that a proper contrarian investor looks at for strong evidence that a share has been unfairly sold off. Things to look at include “a firm’s brand, management team, products, key financial ratios and so on,” he adds.
Short selling activity and trading volumes are other things to look out for.
#2: “Don’t be greedy”
Buying at the very bottom of the market and selling at the ultimate top is just down to luck. Consequently, investors should consider buying a stock “once it is two thirds of the way through a cycle.”
Bennett says too that “sticking to what you know and avoiding magnifying gains via leverage” is important. This can help investors avoid significant losses.
#3: “Admit defeat”
It’s important to consider why I bought a stock in the first place and make sure my investment case stacks up weeks, months, or even years later, Bennett says.
When doing this, it’s critical to avoid outdated or incorrect data, listening just to information that backs up your own view, assuming that a rising stock price is evidence of a wise investing decision, or being overconfident.
Dip-buying can boost returns
History shows us that share markets recover strongly in the years following major economic events. And huge numbers of investors who bought when stock prices were down made a fortune in the rebound.
But it’s not enough just to expect that the rising tide will lift all boats, experts tell us. Some companies might recover more slowly than others, if at all. This can be down to a variety of company-specific or external factors. And this can have a big impact on eventual returns.
Staying level-headed and doing proper homework is essential when investing during bear markets. And I have been buying shares using the key principles discussed above.
I plan to continue building my portfolio as long as stock markets remain under pressure. I could potentially make big returns when the rebound eventually (hopefully) comes.
