“Buy stocks as you would groceries, when they are on sale,” said Christopher Browne , the famous value investor. He also reminded investor the two famous rules of investing: The first is to not lose money, and the second is to not forget rule number one.
The current market scenarios would help investors understand the importance of sticking to the basics of investment rules underlined by investment pundits.
Global stocks markets have turned extremely volatile lately, after being thrashed to decades low on growth worries.
Benchmark indices lost nearly 40% by March-end as novel Coronavirus pandemic triggered sell off in risky asset.
The market crash has caused significant losses for many investors.
Though, we have witnessed a modest recovery since then, but this pullback is limited to few stocks.
A wide range of stocks are yet to recover from one of the most severe and fast-paced stock market declines in living memory.
The risk averse investors may sense more challenges ahead, but can’t turn their back to once in a lifetime opportunity of buying quality stocks.
Even as short-term risks remain, the recovery potential of the stock market suggests that purchasing a diverse selection of companies today could lead to strong capital returns in the long run.
As mentioned, the recent market crash has been one of the fastest and most significant declines in recent decades. Although there have been other bear markets such as the global financial crisis, they have generally occurred relatively infrequently. In fact, bear markets are rare occurrences and often do not last for a prolonged period of time before a recovery comes into force.
Therefore, during an investor’s lifetime there are unlikely to be a large number of opportunities to buy stocks when they trade at bargain levels. Certainly, there are always opportunities to buy attractive stocks in all market conditions. But the valuations that are currently on offer across many industries have not been seen since the financial crisis over a decade ago – if at all — and are unlikely to be present for many more years in future.
The prospect of buying undervalued stocks during a market crash may not feel natural to many investors, it can be a highly profitable exercise. After all, the stock market has always recovered from its declines. This time around is unlikely to be any different over the long run.
As such, it could be a good idea to adopt a long-term view of your holdings and to try to ignore market noise. Many investors have negative views of the stock market, while others are seeking to second-guess the movement of stock prices in the short run. By ignoring their views and instead buying high-quality businesses at low prices for the long run, you could capitalise on bargain valuations at present.
This strategy may require a large amount of self-discipline, as well as an acceptance that paper losses could be ahead in the short run. But it has been a successful strategy for many investors in periods when a market crash has previously occurred.
While buying stocks in a market crash, it is important to manage risk through diversification. It is currently extremely difficult to know which sectors will return to strong growth in the coming years, since the full impact of coronavirus on consumer behaviour is a known unknown. Therefore, reducing your exposure to specific companies and sectors could cut your portfolio risk.
The potential for a second wave of the virus later in the year may hold back investor sentiment to some extent.
However, over the long run, a return to growth seems highly likely. The stock market has always recovered after its past crises to post new record highs. As such, buying high-quality stocks today while many trade on low valuations could be a sound means of generating impressive returns over the long run.
It may also enable you to generate higher returns in the coming years as the stock market gradually recovers.
While the near-term prospects for the stock market are highly uncertain, over the long run its outlook appears to be far more positive. The global economy has experienced numerous recessions in its past, and has always returned to strong GDP growth. Likewise, the stock market has always recovered from its bear markets and downturns to post fresh record highs.
Therefore, investors should use the recent market crash to position their portfolios for a likely stock market rebound over the coming years. It may take some time for stock prices to recover to their pre-market crash highs. But history suggests they’re very likely to do so over the coming years. So the purchase of stocks while they offer wide margins of safety have been a successful strategy in previous market downturns.
Of course, buying high-quality stocks is more important than ever in the current economic climate. For any company to benefit from a stock market rebound, it must first survive the likely global recession that’ll take place this year.
Through purchasing stocks with strong balance sheets, defensive characteristics and sound growth strategies, you can limit your risks and increase your return prospects. This strategy may boost your chances of capitalising on a stock market rebound over the long run following one of the most severe market crashes in history.
Savvy investors like you won’t want to miss out on this timely opportunity.
This document is meant for the recipient only for use as intended and not for circulation. This document should not be reproduced or copied or made available to others. The information contained herein is from the public domain or sources believed to be reliable. While reasonable care has been taken to ensure that information given is at the time believed to be fair and correct and opinions based thereupon are reasonable, due to the very nature of research it cannot be warranted or represented that it is accurate or complete and it should not be relied upon as such. Also above note is not a recommendation to Buy or SELL and is only a view based on facts and figures and we will be in no way responsible for any losses incurred by anyone who uses this information to either trade or invests securities mentioned herein.