Buying value shares and holding them for the long run has been a relatively successful strategy over many decades. It allows an investor to capitalise on low prices that provide capital growth potential. It also allows them to benefit from owning high-quality businesses that may have relatively low risks.
Since many strong businesses currently trade at low prices, it could be a good time to purchase value stocks. They could benefit from a long-term stock market recovery.
The appeal of value shares
Clearly, deciding which companies should be classed as value shares is open to debate. However, they’re likely to include businesses that have dominant market positions in their respective industries.
This may allow them to deliver stronger profit growth than their peers. They’re also likely to have solid balance sheets. This can provide the required level of investment to expand into new growth areas to further enhance their financial prospects.
When such companies trade at prices that don’t fully reflect their long-term financial capabilities, they could offer good value for money. Often, low share prices for high-quality businesses don’t last for long.
That’s because industry or economic disruption has often given way to stronger operating conditions. Therefore, at a time when many companies could be classed as value shares following the 2020 stock market crash, there may be opportunities to build a portfolio that includes them.
A long-term stock market recovery
Many companies have posted strong share price growth in the stock market rally over recent months. But a number of stocks continue to trade at low price levels. This could be because they continue to face major disruption from coronavirus or economic uncertainty. Buying them now could prove to be a sound move. That’s because the stock market recovery is likely to take place in the coming years.
History suggests a strategy that aims to purchase high-quality companies when they trade at low prices has been very successful. Investors such as Warren Buffett have used such a plan to take advantage of the market cycle. They see downturns that have always been followed by rallies that lead the stock market to new record highs. As such, today’s value shares could gain momentum. Certainly as investor sentiment improves and a global economic recovery takes hold.
Adopting a patient approach
Of course, it could take many years for some of today’s most attractive shares to deliver on their potential. The future is always a known unknown. But at the present time it’s arguably more unpredictable than is usually the case due to uncertainty caused by coronavirus.
As such, adopting a long-term approach when buying value shares could be a prudent move. It may enable high-quality companies to deliver on their potential. Over time, a patient approach could be rewarded with market-beating returns that significantly improve an investor’s financial prospects.
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.