The S&P 500 may have experienced declines in recent trading sessions, but it has rebounded by around 23% since reaching its lowest level for over three years in March 2020.
In the short run, markets could still experience significant volatility as the bear market continues. However, in my view, the current price level may prove to be attractive for investors who focus on company fundamentals.
By accepting the possibility of short-term declines and instead assessing the stock market based on its long-term opportunities and current valuation levels, investors could generate market-beating returns.
Long-term focus
High volatility is not a new occurrence for the stock market. Past bull markets and bear markets have included periods of uncertainty where it was unclear whether gains or losses were ahead .
According to the father of value investing, Benjamin Graham, “In the short run, the market is a voting machine. But in the long run it is a weighing machine.” Thus, it is best to focus on companies with strong fundamentals rather than those stocks that are currently popular with investors.
Value investing
After its recent rebound, some investors think that stock prices are now too high. As a result, they may determine that it is better to wait for a decline in the index’s price level before buying.
Paying too much for a stock can be detrimental to your returns, as highlighted by Warren Buffett (Trades, Portfolio): “For the investor, a too-high purchase price for the stock of an excellent company can undo the effects of a subsequent decade of favorable business development.”
Even though the S&P 500 is trading below its 2020 highs after its recent gains, some stocks may now fail to offer attractive valuations following the index’s rebound. However, some companies still offer margins of safety.
Investor sentiment
During periods of economic uncertainty, it can be difficult to ignore the views of other investors. At the moment, for example, some investors may be feeling bullish following the stock market’s recent gains. Others, in contrast, may be cautious about the economy’s outlook. According to Seth Klarman (Trades, Portfolio), you should focus on your own views rather than those of other investors:
“Successful investors tend to be unemotional, allowing the greed and fear of others to play into their hands. By having confidence in their own analysis and judgement, they respond to market forces not with blind emotion but with calculated reason.”
Ultimately, no investor can accurately predict the short-term movements of the stock market. Therefore, by ignoring the viewpoints of your peers and instead assessing the merits of a business using your own analysis and judgment, you may be better placed to capitalize on opportunities to buy undervalued stocks during an uncertain period.
Making mistakes
Even by adopting a long-term focus and investing in quality businesses at the right price, you could still experience losses. This prospect should not cause you to give up on buying stocks. As Peter Lynch once said, “People who succeed in the stock market also accept periodic losses, setbacks, and unexpected occurrences. Calamitous drops do not scare them out of the game.”
Read more here:
- Charlie Munger's Advice on Buying Stocks
- Howard Marks' Tips on Investing in a Volatile Market
- Seth Klarman on Accepting Your Limitations When Investing
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