With 2022 now firmly behind us, my focus turns to making the most out of this year. Given the lacklustre performance from the stock market last year, I think the current backdrop could offer me exceptionally good long-term returns. But isn’t inflation at record highs and the UK in recession? Yes! But that’s exactly my point. Let me explain.
A note from Warren Buffett
As one of the greatest investors of our generation (and the generation before that), Warren Buffett has been through it all. One of the pieces of wisdom was to “be greedy when others are fearful and fearful when others are greedy”.
What he meant was that during periods of high uncertainty or worry, he would seize the opportunity and buy stocks. The reason for this is that when people are fearful, they can make irrational decisions and sell stocks that are fundamentally sound. This pushes the share price down below a fair value. At this point, buying below the fair value can lead to a profit in years to come when the market stabilises and recovers.
Over the space of 2022, investors did have a long period of uncertainty. The reasons include the war in Ukraine, high inflation, rising interest rates, and more. As a result, I sit here at the start of 2023 and think that there are some shares that have been pushed down below the fair price.
Peak bearishness
The phrase that’s being started to be thrown around is that the stock market has reached peak bearishness. A bear is used to identify someone who thinks the market will fall. If we have reached the height of pessimism, it could be the time for me to start buying.
I feel that most of the bad news is already factored in to the share price of most firms. We’re all expecting high inflation to hurt our pockets this year. We’re also all pretty glum about the recession. But these points aren’t a surprise to us anymore. The expectation bar is set so low. So it’s going to be hard for the market to continue to fall in 2023, unless we get fresh bad news.
Gems in the stock market
There are 18 stocks in the FTSE 100 down at least 30% over the last year. Not all of these are going to be smart buys. But I know some in that list that I’m thinking about buying. These include the Scottish Mortgage Investment Trust and Rightmove.
I’m not sure I’ll have another opportunity in this generation to be able to pick up large-cap stocks at such a big discount versus where they were trading a year ago. If my theory is correct and we have reached peak bearishness, then the returns in coming years could be very large.
The main risk to my view is if a fresh negative catalyst hits us, causing a stock market crash. To try and manage for this risk, I’m going to stagger my purchase of value stocks this year and avoid going all-in straight away.
