A strategy that aims to buy dirt-cheap shares now, and hold them for the long run, could be a means of making a million. It could enable an investor to capitalise on low valuations, as well as a likely stock market rally, in the coming years.
As such, now could be the right time to focus on unpopular sectors that are more likely to contain cheap stocks. They could see improving operating conditions as the world economy recovers from its present crisis.
Buying dirt-cheap shares before a stock market rally
The stock market has made gains in recent months, but it continues to trade below its record high. Moreover, many industries are facing tough operating conditions in the short run that are causing weak investor sentiment. They could provide opportunities to buy shares when they trade at low prices ahead of a likely stock market rally.
The track record of indexes such as the FTSE 100 shows that they have always bounced back from low points to produce new all-time highs. This outcome is likely to be repeated in the coming years. More industries will return to normality following coronavirus and stimulus action undertaken by policymakers will take full effect.
Therefore, buying shares that are currently undervalued could be a sound means of capitalising on the stock market’s long-term growth potential. They may have greater scope for capital gains in a stock market rally than shares that have already recovered from the 2020 market crash.
Focusing on quality, as well as price
Of course, it is important to focus on the quality of companies alongside their price. Some businesses may be left behind in a long-term stock market rally. That includes those with poor strategies that are too rigid in a fluid economic environment, or lacking the financial means to change their structures in response to shifting consumer tastes.
Therefore, it is important to consider company fundamentals as well as their prices. In doing so, it is possible to unearth high-quality businesses that trade at prices that are below their intrinsic values. They may be the stocks that offer the greatest growth potential, and are the most attractive buying opportunities of today.
Making a million
It is possible to outperform indexes such as the FTSE 100 in a long-term stock market rally. How? Through buying dirt-cheap shares. But simply matching the return of equity markets could lead to a seven-figure portfolio.
For example, the FTSE 100 has produced total returns of around 8% per annum since inception. Assuming the same return on a £500 monthly investment would produce a portfolio valued at £1m within 34 years. But buying high-quality companies at low prices could really pay off. It is possible to earn a higher return that way and reduce the time it takes to make a million.
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.