Even with the economic outlook improving monthly, UK shares continue to be volatile during this earnings season.
Yet looking at the track records of legendary investors such as Warren Buffett proves that periods like these are the perfect hunting grounds for bargains. That’s the case whether it’s US shares as he prefers, or the UK shares that I like.
Some of the best companies in the country are on sale right now. And those that can identify and buy these stocks while they’re still undervalued can potentially lock in lucrative long-term gains. With that in mind, let’s explore some clever tactics to find and capitalise on these opportunities.
Don’t be scared of volatility
Watching a position drop by double-digits can be quite a stomach-churning experience, especially for novice investors. Numerous behavioural finance studies have shown that the pain of losses is far stronger than the joy of gains. That’s why panic selling, even among professionals, is so common despite the fact that experts know it’s a mistake.
Volatility is a natural part of the investing journey. And while it can be unpleasant, it can be leveraged as a powerful wealth-building tool for long-term investors.
In the short term, valuations are driven by general investor sentiment. When investors, in general, feel pessimistic about the future, shares typically head in the wrong direction, and vice versa. This forward-thinking mentality is why stock market crashes, and corrections, throughout history have almost always come before a recession rather than during one.
But in the long term, a share price will reflect the quality and value of the underlying business. So a sudden dip in share price due to near-term concerns that don’t compromise the long-term strategy could very well be a terrific buying opportunity.
Focus on competitive advantages
Despite having a reputation for snapping up cheap shares, Buffett doesn’t just buy any old discounted stock. He operates with the mentality of holding onto the shares forever. Therefore, he’s only interested in buying companies that have the capacity to thrive for decades to come.
Knowing which businesses will be world titans a decade from now is pretty difficult. A quick glance at the history of the FTSE 100 shows that the mix of the largest enterprises in the UK has constantly changed. The same is true for the S&P 500 across the pond.
However, something that all leading businesses today share is a competitive moat. These are made up of a collection of hard-to-replicate advantages that enable companies to have a significant upper edge against their competitors. The wider the moat, the easier it is to protect and steal market share, eventually dominating an industry.
The bottom line
There are never any guarantees when it comes to investing in the stock market. Even the biggest or most promising UK shares can end up falling short of expectations through no fault of its own. After all, disruptions to businesses aren’t always internal.
However, portfolio risk can be managed through tactics like diversification and pound-cost averaging. And in the long run, consistently picking up top-notch stocks trading at a discount is a proven recipe for building wealth.