Despite recent gains made across the stock market, the S&P 500 is still down around 16% from its 2020 high. Its performance continues to be highly volatile, which is a trend that is likely to continue in the short run, as the economy’s outlook remains uncertain.
Investing at such a time may prove difficult for many investors, as it its tempting to focus on emotions rather than company fundamentals.
However, according to Oaktree Capital's chairman, Howard Marks (Trades, Portfolio), buying undervalued stocks is a sound strategy that generates high returns in the long run, despite market volatility.
Ignoring other investors
The stock market’s overall decline since the start of the year may naturally cause investors to become pessimistic about the prospects for a wide range of stocks. According to Marks, ignoring other investors is a means of improving your investment returns:
“There’s only one way to describe most investors: trend followers. Superior investors are the exact opposite. Superior investing, as I hope I’ve convinced you by now, requires second-level thinking—a way of thinking that’s different from that of others, more complex and more insightful”.
Going against the views of your peers may not be an easy task, but the stock market is cyclical, and its trends inevitably do not last forever. Therefore, buying during periods of heightened market volatility could allow you to obtain quality stocks when they are undervalued.
Investing using your emotions
Volatile stock prices that are down from just a couple of months ago can cause investors to become increasingly fearful about the future. Their portfolios may have declined in value, and the prospects for all companies now appear to be less certain than they were at the start of the year.
According to Marks, though, “The biggest investing errors come not from factors that are informational or analytical, but from those that are psychological.”
By focusing your time on unearthing companies with sound fundamentals, rather than trusting your instincts, you may be able to more efficiently allocate your capital.
Company valuations
The stock market’s fall in 2020 means that many companies are trading on attractive valuations. In the short run, stock prices could move lower depending on news and company earnings. However, focusing on buying undervalued stocks is still the way to go. As Marks said:
“Buying something for less than its value. In my opinion, this is what it’s all about—the most dependable way to make money. Buying at a discount from intrinsic value and having the asset’s price move toward its value doesn’t require serendipity; it just requires that market participants wake up to reality. When the market’s functioning properly, value exerts a magnetic pull on price”.
Read more here:
- Seth Klarman on Accepting Your Limitations When Investing
- Peter Lynch on Having a Simple Investment Strategy
- Warren Buffett's Advice on Coping With Stock Market Losses
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