The stock market has enjoyed a bit of a rally, with both the FTSE 100 and FTSE 250 up by double digits since last October.
It seems British investors are steadily regaining confidence in the financial markets now that inflation is finally starting to cool off, falling from 8.7-7.9% in June this year.
Obviously, there’s still a long way to go before returning to the ideal range of 2-3%. However, since shares are always looking forward, the clearer path to economic stability is helping valuations recover from the 2022 correction.
And investors comfortable with a bit of volatility now have the opportunity to ride the tailwinds of this stock market rally.
So the question now becomes, what are the best shares to buy in 2023?
Focus on the business, not the trend
There have been a lot of exciting growth stories emerging lately, especially when it comes to artificial intelligence. RC365, for example, has seen its valuation skyrocket in the last 12 months, surging by roughly 730%!
Obviously, that’s an extraordinary performance. But a closer look at the underlying business leaves so much wanting.
It’s important to remember that share prices are driven by mood and momentum in the short term. When hype starts to build surrounding a particular technology or company, valuations have a habit of reaching huge levels, only to inevitably collapse again.
Correctly predicting when a stock will peak can unlock tremendous wealth. The problem is this is nearly impossible for even the most skilled investor.
And in the rare occasions when someone makes the right call, it’s usually down to pure luck. Needless to say, luck isn’t a prudent investing strategy.
Therefore, investors searching for opportunities in this stock market rally will be far better served to find high-quality enterprises trading at a discount rather than pursuing risky penny stock surges. At least, that’s what experience tells me.
Finding quality stocks during a rally
Identifying a high-quality business that’s undervalued is usually a challenging process. But thanks to the ongoing economic uncertainty, indiscriminate downward volatility has helped in this regard.
Still, investors need to spend time searching. And generally speaking, the best bargains won’t be found among the popular industries.
The more investors are searching in one location, the less likely they’ll find a lucrative opportunity. It’s a bit like the California Gold Rush in 1848, where despite hundreds of thousands of people sifting for gold, only a few early birds actually made any meaningful profits.
That’s why investors will most likely find the best deals in industries that are currently out of favour.
Personally, I’m becoming increasingly interested in the real estate and industrial sectors. Rising interest rates certainly place pressure on these capital-intensive businesses. But there are always exceptions.
However, even if investors successfully identify terrific companies to buy in this stock market rally, keeping risk in check is critical.
Simple strategies like diversification and pound cost averaging can work wonders in reducing portfolio volatility. And providing the investment thesis is correct, tremendous wealth could be potentially unlocked in the long run.
