With market sentiment improving in the last few weeks, British value shares are starting to move back in the right direction. Lower inflation paired with falling mortgage rates has sparked fresh confidence in the financial markets. And with a recession seemingly being avoided, 2024 looks like it’s going to be a far more pleasant year for investors compared to 2022 and 2023.
However, does that mean the window of opportunity to snap up bargain buying opportunities has now closed?
The best opportunity to unlock value?
While corrections and crashes can occur quite rapidly, recoveries tend to move at a far slower pace. Therefore, even if shares continue to move up over the next few weeks and months, there will likely still be plenty of bargains to capitalise on.
Therefore, while investors should strive to snap up cheap shares as quickly as possible, there is no need to rush due diligence and research. In fact, doing the latter would more likely than not end up destroying wealth even at current prices.
However, waiting too long could also be a critical mistake. There will always be investment opportunities for investors. But it’s been more than a decade since the financial markets suffered a downturn as severe as 2022. And it could be another decade before such downward volatility repeats itself.
Why is that a problem? Because throughout history the best buying opportunities have almost always emerged right after such events. In other words, 2024 could be one of the best times to buy low and eventually sell high for many years to come.
Managing risk and expectations
Some shares could see an explosive comeback over the next 12 months. But others may need a bit longer to bounce back. And during that time, plenty of things could go wrong. Even if an investor successfully identifies a fantastic business trading at a discount, a new disruptive force could emerge during its recovery that may invalidate an investment thesis.
For example, a firm that has finally got production back on track could unexpectedly see its primary factory go up in flames, decimating cash flows for years to come. Or, in extreme cases, it could be revealed that the financial accounts are just outright fraudulent.
Such events are rare, but they do happen. Fortunately, the impact of such catastrophes can be easily mitigated through prudent diversification. By owning a range of promising businesses, the failure of one can be offset by the success of others, allowing a portfolio to thrive even if a single position fails to live up to expectations.
Another risk-management tactic is pound-cost averaging. Recoveries can be just as volatile as collapses. As such, a cheap-looking share price today could get even cheaper tomorrow. Spreading out buying activity does incur more trading costs due to the higher number of transactions. But it also enables investors to snap up a larger stake in promising value shares at potentially even better prices over time.
