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You don’t have to buy the market

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There’s a debate raging as to whether shares are a buy on the cusp of a V-shaped recovery or a bear trap in the midst of a global recession.
 
On the one hand you have the famous billionaire investors.

And on the other hand you have, well, famous billionaire investors.
 
But you also have the likes of you and me…
 
Don’t tell me you don’t have an opinion! We all do at times like this:

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  • Bulls point to falling Covid-19 infection rates, progress on treatments and vaccines, economies emerging from lockdown, Central Bank intervention and government stimulus, and stock market indices that in most cases are still well down from their highs.
  • Bears groan and note we still don’t have a good treatment for the virus, a vaccine won’t arrive in scale until next year at the earliest, economic growth has slumped to an unprecedented degree, unemployment has surged, Government support measures are unsustainable, and shares have already rallied despite all this.

Who’s right? As usual, I can see both sides.
 
But the handy thing is I’m a long-term investor in stocks, not a short-term market timer buying and selling indices.
 
This means I have more options – and also more ways to be right.  

Glass half-full

It’s possible – likely – that some of the long-term holdings in my portfolio might suffer in a tough trading environment for the rest of 2020 and into next year.

However, when I bought these companies, I did so knowing they’d face recessions as well as booms. I believe they are inherently superior businesses that can do better than their rivals in all economic environments, and thus deliver stronger returns over the long-term.

This same logic holds true of long-term investments I make today.

I recently bought shares in Davide Campari-Milano, the owner of spirits such as Campari, Aperol, and Grand Marnier. This Italian company has seen its shares hammered in the Covid-19 crisis, and I’ve no doubt 2020 will be a year to forget for the business.

But do I think these brands will still be popular in ten or 20 years time?

Absolutely.

Provided the company survives (or is acquired at a premium) and the virus crisis ultimately fades, a company like this can be a great purchase today at the right price, even if the next year or so is rough.

Pour me another

Alternatively, if you’re an impatient sort, you can buy into firms prospering today even during the crisis.

For example Admiral, Hargreaves Lansdown, Ocado and Tesco are all doing fine in 2020.

The danger is you overpay for the comfort of not having to squirm your way through the rest of the year. It’s hardly a secret these firms are doing well. Hence that information and more may be in the price.

However, investing is never an exact science. Ocado, say, could now be on an accelerated path towards higher earnings in a decade’s time thanks to the extra troubles in the retail sector today.

And for all these companies, cash earned now – as opposed to losses sustained by other, less fortunate firms – has a real value. It can be reinvested into widening their business moats so that even when conditions normalise, they remain ahead of the competition.

Thus the shares could yet be undervalued, depending on how you see such longer-term factors playing out.

I think I’ve had enough…

Even if I was more bearish, stock picking still gives me more options.
 
I might not fancy buying the FTSE 100, for example, but if I were gloomy about the UK economy I especially wouldn’t want to own domestic plays – banks like Royal Bank of Scotland or estate agents like Foxtons.
 
As a stock picker I can implicitly ‘edit’ my portfolio to avoid owning companies that would be unavoidable if I simply bought the index.

Just the tonic

It’s always worth remembering most stock pickers fail to beat tracker funds.
 
We believe this is particularly true of short-term traders trying to guess what shares will do over the next few months, as opposed to the next few years.
 
However, if you do have a strong view on the path of the economy, the 2020 crash, or the more recent rally, remember you don’t have to express that by buying the same shares as everyone else via an index fund.
 
We’re long-term business focused investors at The Motley Fool, and we’d urge you to think that way, too.
 
But if you can’t keep the short-term far from your thoughts, then stock picking – with the right mindset – could also be for you!

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Owain owns shares in Hargreaves Lansdown and Davide Campari-Milano. The Motley Fool UK has recommended Admiral Group, Hargreaves Lansdown, and Tesco.

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