Many shares are currently cheap. Over the past few years, the stock market has received the biggest and longest pummelling I’ve ever witnessed in my investing career.
And now some investors are beginning to throw in the towel.
In adversity, there’s opportunity
Last week, on one public online discussion forum, an investor put into words what many of us must be feeling.
The poster said they’d been finding the length of the bear market, for small-caps in particular, hard to cope with. And that’s because of the profit warnings and setbacks that have been a big part of the landscape for small-cap stocks recently.
There’s no doubt that it’s been hard to make progress for some time in the small company arena. And the investor who kicked off the discussion said they intended to stop trying to invest in individual company shares for a while.
And that was even though they believed a bull market will eventually arrive.
Instead, the investor had a plan to put money in investment trusts “to avoid company-specific issues and profit warnings”.
And that’s not a bad strategy. Especially if we need time out of hands-on investing. After all, as exciting and fulfilling as do-it-yourself investing can be, it’s also often exhausting.
A rallying cry!
But the discussion continued. And another investor jumped in with a rallying cry for us all.
They said they’d been investing since the 80s and can’t remember a more difficult time than recently to make consistent profits.
However, it’s often darkest before the dawn. And although we can’t know when the markets will recover, we can assume that the beginning of the recovery is getting nearer.
According to that poster, small-cap company shares are trading at “hugely” attractive multiples. And it feels like “Armageddon” has been priced into valuations.
They also observed that fund redemptions have also been driving share prices lower. And that happens indiscriminately, without any judgement about business valuations.
The poster said today’s conditions present as “one of the best investment opportunities of my lifetime”. And that’s because of low valuations.
Buy and wait
The poster’s approach to investing now is simple. Patience is key, they said. And advised us to find good businesses that are undervalued, buy some of their shares, and then do nothing. Even if that means sitting through short-term volatility in a portfolio.
Maybe in some cases it will take years rather than weeks and months to achieve positive gains. And it’s also possible that some investments may not work out as planned, despite a low-looking valuation now.
Indeed, all stocks carry risks as well as positive potential. And any business can face setbacks from time to time.
But if we are prepared to hold shares with a time horizon of at least five years, I agree with that investor we could be seeing a golden opportunity in small-caps right now.
