Is there a stock market recovery coming? The FTSE 100 hasn’t fallen into official bear market territory like the S&P 500 and the Nasdaq. But it’s still had a pretty dire decade. And we’re surely due a new bull market soon, aren’t we?
I’m not getting into the prediction game today. Instead, I want to address a few common investing mistakes I’ve seen that I hope investors can avoid during the next market rise.
Ignore social media
Social media is a relatively new one for me, as we didn’t have it for most of my investing career. But the principle is the same as it always was. Don’t follow the latest fad or fashion, and ignore those trying to pump their favourite shares. Social media makes this a bigger problem now.
By the time the internet is abuzz with the latest get-rich-quick shares, everyone will already know about them. And in my experience, that suggests they could be set for a fall.
Forget getting rich quick
In any sustained stock market recovery, we’ll see people trying to double their money overnight, for sure. It’s happened during every bull run I’ve ever seen, and I have no doubt it will happen again.
Sometimes the early investors get lucky, and make a good short-term profit. But they’ll often then pile into the next bubble to come along… and bubbles eventually burst. I still remember the huge losses I saw friends suffer when the dotcom boom collapsed.
Avoid short-term thinking
Both of these are results of short-term thinking. And it’s understandable. We’ve seen UK shares underperforming for years now. So we need to make the most of any gains while they’re happening, and get out before the next fall, don’t we?
Trying to time things like that is near impossible, and rarely leads to success. No, the best shares to buy for a stock market recovery are the same ones to pick any time, bear market or bull market. They’re companies with long-term profit and cash generation potential, when they’re good value.
Don’t confuse price and value
And that reminds me how important it is to not confuse share price with value. When investors see the early leaders of a stock market recovery, they will often buy simply because they’re going up.
That can work well, up to a point. But, almost inevitably, at some point the price will overshoot a stock’s rational valuation and keep going up. Every bull run, I see stocks reaching price-to-earnings (P/E) ratios that are unsustainable over the long term.
Stick to a strategy
Finally, what all these mistakes boil down to is a failure to develop an investment strategy and stick to it. This is a mistake I’ve made plenty of times before, and I fully expect to make it again.
My aim, though, is to seek companies, to use Warren Buffett’s words, “whose earnings are virtually certain to be materially higher five, ten and twenty years from now.” I want to lock in reliable long-term dividend income.
But if I see a profitless growth share that I think has a great chance? Well, I might plonk down a small amount.
