Many cheap shares populate the London stock market right now. And last month, well-known fund manager Mark Slater sent out a message to the investors following his funds – and I’m one of them.
In short, he thinks there’s good value around in stocks and shares right now. And the bear market is likely nearing its end. So that means the next bull phase for stocks may arrive soon.
The bear market is ageing
According to Slater, the bear market that started in late 2021 is getting old. And it has caused valuation de-ratings for many stocks.
The Slater funds have not owned as many companies on single digit price-to-earnings multiples since 2008-9. And that, of course, was during the financial crisis of that decade.
But in some ways, economic and geopolitical conditions have been just as challenging lately as they were back then. And Slater pointed out we’ve even seen problems in the banking sector.
Investor pessimism is running high. And Slater thinks we are in the disillusionment phase. But that may be a good thing, suggesting the possibility of better times ahead for stocks and shares.
Slater quoted one-time fund manager Sir John Templeton: “Bull markets are born on pessimism, grow on scepticism, mature on optimism and die on euphoria.” And Templeton was known for investing at points of maximum pessimism in the markets.
But Slater added that bear markets kill off the euphoria of the previous phase. Then they grind away at any residual optimism until almost all market participants are deeply pessimistic.
And his conclusion is that the chances are high that the current bear market is nearing its end, given the current downbeat mood.
Seeking value
Nevertheless, Slater insisted he doesn’t entertain market timing within his funds. Instead, he aims to buy shares in businesses he understands. And only if they have the potential to compound their earnings over time.
But, crucially, he added that majority of the businesses in his fund will likely continue to make progress despite a challenging economic environment. Although he conceded that some may see their growth rates slow temporarily.
However, they will likely improve their competitive positions by gaining market share, or by making cheaper acquisitions.
Although, so far, a handful of companies in the Slater portfolio have experienced problems. But the issues are “temporary or fixable”.
Meanwhile, as companies grow their earnings while their valuation multiples fall, they’re getting cheaper and cheaper. And that situation is unlikely to continue. Sooner or later, shares will likely rise to accommodate the value building up in businesses. And that’s how bull markets tend to begin among the last gasps of a bear market.
To me, Slater’s observations mean it’s a great time to shop for good value. And April may even prove to be a can’t-miss opportunity to aim to get rich with cheap shares.
But it’s worth bearing in mind that all stocks come with risks as well as positive potential. And that includes those of businesses trading with a low-looking valuation.
Nevertheless, finding good value on the stock market strikes me as a decent starting point when aiming to construct a diversified long-term portfolio.
