There’s always some degree of uncertainty whenever we buy shares. We never know what’s going to happen in the future. We never will. It’s just that lately this uncertainty has been above normal levels. But that isn’t a bad thing for adventurous investors. In fact, it creates the kind of buying opportunities that allow investors to achieve above average returns and beat the market in the long term.
If there was no uncertainty, then all investors would come away with the same returns, and it would be impossible to beat the market. There certainly wouldn’t be any opportunities to double your investment. I think it’d be a bit boring, too.
Buy shares during high levels of uncertainty
In general, higher levels of uncertainty will result in lower share prices. This isn’t because the underlying companies have become worse. Instead, it’s because investors lose confidence in future prospects, and reduce their valuations accordingly. This is logical. If you’re less sure of a company’s ability to maintain its profits, then your valuation of the company will be lower and you’ll be less inclined to buy shares altogether.
The problem is that investors often overreact to short-term news and events. That is, in times of uncertainty, we become overly pessimistic. We fail to make an accurate judgement of what is currently happening and how it will affect a company’s earnings in the future. This makes us sell shares when we shouldn’t, and not buy shares when we should. The result is that in times like this, top-quality companies trade at attractive prices.
I think now is a great time for investors to buy shares. I believe that some way or another, we’ll deal with and overcome Covid-19. Once this happens, I think share prices will move upwards and once again trade at the multiples that they have done in the past. Investors that buy shares now will likely be rewarded with outsized returns.
We have only been dealing with Covid-19 for six months. I think that’s nowhere near long enough for us to change our entire judgement of the next 10 to 20 years. If businesses, economies, and stock markets could recover from the Second World War, which lasted for six years, then I think they will recover from this.
We’ve already seen how this works over the last few months. Since reaching their lows at the end of March, share prices have since shot up. The FTSE 100 has risen by over 20%. Some of the shares that were hardest hit have seen their share prices double. Investors have been rewarded with huge returns, for taking on extra risk and investing in uncertain times. This is nothing new. This is what happens. It’s a feature of stock markets and human behaviour. Even more so when central banks have pumped so much money into the financial system.
Besides buying shares now simply to take advantage of cheap share prices, we should also be investing to protect our money from inflation. Leaving our money in the bank – where interest rates are so low – is going to result in its value being eroded. Over a long time frame, the effects of this can be disastrous. That’s why I’m committed to buying shares through the uncertainty and beyond.
Thomas has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.