The FTSE 100 has climbed almost 5% over the last 12 months, including dividends. Considering the current state of the financial markets, that certainly signals resilience to the ongoing economic challenges plaguing Britain.
However, because the index is weighted by market capitalisation, this performance is somewhat misleading. A closer inspection of its constituents reveals plenty of businesses that have yet to recover from the 2022 correction.
Some 45 of the 100 stocks in the UK’s flagship index are currently in the red over the last 12 months. And this number increases to 64 over the last two years. But as bleak as this sounds, it might actually signal that now’s a terrific time to be buying British shares.
Buy low, sell high
Snapping up stocks at bargain prices is how investors like Warren Buffett made their fortune. During a bull market, when growth stocks are reigning supreme, this can be a bit tricky to pull off. Why? Because determining whether a stock is cheap is virtually impossible using traditional metrics like the price-to-earnings (P/E) or price-to-sales (P/S) ratio.
But when stocks are in the gutter, these ratios become far more powerful. With most investors concerned with protecting their wealth and minimising losses, these metrics can easily get ignored, allowing for obvious discounts to be spotted.
Of course, in some cases, a tumbling share price may well be justified. Not every company, even those in the FTSE 100, are going to emerge from this current storm unscathed. And we’ve already seen some like Johnson Matthey and Persimmon tumble into the FTSE 250.
Yet, every so often, an exception emerges where investors have ended up panic-selling an enterprise that’s fundamentally sound. There are undoubtedly multiple businesses within the FTSE 100 today where this applies. And adding them to a portfolio today at an undervalued price could unlock substantial long-term gains.
Best opportunity in a decade?
There are new buying opportunities emerging in the stock market every day. But finding them can be tricky when most investors are thinking logically rather than emotionally. Fortunately, most are operating in the latter state right now and emotionally driven selling means there are plenty of bargains. And while investing during a severe stock market correction or crash is a volatile experience, it’s also proven to be one of the best periods to make the biggest returns during the eventual recovery.
As Sir John Templeton put it: “The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell”. And this isn’t dissimilar to Buffett’s advice of “be fearful when others are greedy and to be greedy only when others are fearful”.
Yet, while these famous investors have made their fortunes by capitalising on fearful investors, such opportunities are actually quite rare. We haven’t experienced a severe market drawback like this in over a decade, excluding the Covid-Crash in 2020, which lasted only a couple of months.
That’s why right now might be one of the best times to start investing.