While there are still plenty of pessimistic investors around today, a stock market recovery is on its way. At least, that’s what the perfect track record of leading indices would suggest.
Throughout history, flagship benchmarks like the UK FTSE 100 and US S&P 500 have bounced back from even the direst financial catastrophes. That’s not a pattern I expect to change this time around. After all, the economic conditions today, while bad, are nowhere near as disastrous as what was experienced in 2008 or other previous economic meltdowns.
That’s why the biggest question is not if a recovery will occur but rather when. Unfortunately, it’s nearly impossible to predict the start of a market rally. Perhaps it’s even already started.
The recent uplift in valuations across many FTSE stocks since the start of November would suggest things have already started to get better. And if this is the case, time might be running out for investors to capitalise on dirt cheap bargains.
Walk, don’t run
One of several golden rules in investing is to never rush into a decision. Yes, some bargains may be disappearing soon, but there will always be more opportunities in the future. In other words, don’t let the fear of missing out drive the decision-making process since that will likely end in disappointing returns.
Of the thousands of companies listed on the London Stock Exchange, only a small minority will actually deliver sustainable market-beating returns. And finding them doesn’t happen overnight.
Investors need to spend time researching and investigating the businesses behind each stock to make an informed decision. Beyond the analysis of financial statements, qualitative factors such as competitive advantages, management talent for capital allocation, and corporate strategy also need to be studied. And while some companies are simpler than others, this research process can take a while.
Fortunately, services like the Motley Fool Share Advisor can help in that department.
Capitalising on bargains
By being thorough when researching a business, it’s easy to eliminate potential duds from consideration. After all, investors only want to invest in the best companies. Yet, even buying shares in the world’s greatest company can still be a terrible investment if the wrong price is paid.
With the market throwing a bit of a tantrum over the last two years, many promising enterprises are trading at a discounted valuation. But even at today’s levels, lofty long-term expectations could still make them too expensive.
Adding overinflated shares to a portfolio can work out if expectations are met. But this comes with significantly higher risk since one missed target can be all it takes to send the stock price tumbling. Similarly, if a stock looks absurdly cheap, then caution could be warranted as well.
It’s easy to miss a critical piece of information when analysing a business that could invalidate an entire investment thesis. Therefore, when looking at a potential bargain, it’s important to find out why the shares have fallen in the first place. For example, a temporary disruption to operations is far less concerning compared to an impending lawsuit over stolen trade secrets.
Investing in high-quality companies at a cheap price is a proven recipe for building wealth. And while there are never any guarantees, a well-executed strategy makes the risks worth the potential rewards, in my opinion.
