The clock might be ticking for investors to capitalise on cheap shares. The latest predictions by The Economy Forecast Agency (EFA) anticipate the FTSE 100 could reach as high as 8,368 points by February. Compared to today’s levels, that suggests a double-digit surge for the UK’s flagship index could be due within less than three months.
A large jump in stock valuations would be a welcome sight for most investors. But that also means the window of opportunity to snap up today’s bargains may be closing. Of course, there will always be more chances to capitalise on discounted valuations in the future. But not acting today could leave a lot of money on the table.
So what’s the best way to seize this opportunity?
Forecasts and accuracy
While there’s a high sense of urgency, investors should never rush into making investment decisions. Buying even cheap-looking shares can backfire spectacularly if due diligence isn’t executed correctly. With that in mind, it’s important to highlight that forecasts are notoriously inaccurate.
When it comes to predicting short-term stock market movements, there are simply too many fast-changing factors to input into a model without making some pretty lofty assumptions. But even if the EFA’s right, the prediction of the FTSE 100 hitting 8,368 is the best-case scenario. In the worst case, the index could actually drop to 7,420 points.
That means investors may have more time than expected to capitalise on bargains. And it re-emphasises the importance of not rushing into bad investments caused by the fear of missing out.
Researching winners
There are thousands of publicly-traded companies on the London Stock Exchange for investors to pick from. Many of these businesses will chug along nicely for decades to come, helping individuals build wealth.
However, only a minority of these will have what it takes to outperform the benchmark index. And investors who can successfully identify these shares could unlock impressive volumes of wealth, especially if they buy them while they’re absurdly cheap.
Of course, that’s easier said than done. There are a lot of factors that go into what makes a good and bad investment. And this process is only made more complicated by the personal circumstances of each investor, such as their time horizon and risk tolerance.
However, by studying the biggest businesses today, some common traits start to emerge. Most notable is the presence of competitive advantages. Companies that can systematically and consistently increase their upper edge against rival firms are far more likely to be able to expand and defend their market share.
Advantages can come in many forms, from a reputable brand to a unique and difficult-to-replicate business model that provides higher profit margins.
Obviously, a competitive edge isn’t the only factor to consider when searching through cheap shares to buy. But they can serve as a good starting point to eliminate the likely duds from consideration.
