The stock market’s recent crash means that many companies are trading on relatively low valuations compared to the height of the bull market. Therefore, value investors may find that they have a wider range of buying opportunities available at the moment.
Deciding where to invest can be a difficult task when there is a great deal of choice. However, by following Benjamin’s Graham’s advice on assessing the quality of a company’s management, buying unpopular stocks and focusing on fundamentals, you could better capitalize on low valuations to purchase attractive businesses for the long term.
Company fundamentals
Uncertain market conditions may cause investors to consider a wide range of factors when determining which stocks to buy. For example, they may try to second-guess the prospects for the economy, or estimate how investor sentiment could change over future months. However, according to Benjamin Graham, the best place to start when analyzing a business is its fundamentals:
“In most cases, favourable price performance will be accompanied by a well-defined improvement in average earnings, in the dividend, and in the balance-sheet position.”
Adopting this approach may be more challenging at the moment due to an uncertain macroeconomic outlook. However, investing in businesses with solid finances that can produce long-term earnings growth could lead to a more efficient allocation of your capital, as these businesses are not dragged down as much by leverage.
Management impact
Company management has a major impact on the financial performance of a business during periods of economic growth. However, management decisions made during periods of economic uncertainty can have an even greater effect on the long-term prospects for a business.
Their decisions can strengthen a company’s market position against sector peers. Likewise, poor decision-making by company management can reduce a firm’s capacity to survive difficult operating conditions. Graham highlighted the importance of assessing company management by saying, “Good management produce a good average market price, and bad management produce bad market prices.”
By assessing the track record of a company’s management team and understanding their current strategy, you can gain insight into whether the business will develop a wider economic moat over future years.
Contrarian investing
Buying unpopular stocks can be challenging. It can be difficult to go against the views of your peers at a time when many companies face worsening trading conditions.
However, being a contrarian investor allows you to use the stock market’s cyclicality to your advantage through buying companies that offer wide margins of safety. According to Graham, “The best values today are often found in the stocks that were once hot and have since gone cold.”
At the moment, many quality businesses with the potential to grow their earnings are unpopular among investors due to an uncertain economic outlook. This could mean there are buying opportunities for investors who can look beyond short-term risks and instead focus on the recovery prospects for undervalued stocks.
A disciplined approach
Maintaining a consistent and disciplined approach when analyzing stocks during a market crash could be crucial to identifying the most attractive buying opportunities.
By contrast, adapting your approach to suit changing market conditions may induce a degree of caution into your actions. This could mean that you miss out on purchasing stocks with the widest margins of safety.
Graham was a believer in being consistent and disciplined when analysing stocks, advising that “Successful investing professionals are disciplined and consistent and they think a great deal about what they do and how they do it.”
Read more here:
- Warren Buffett's Advice From the Financial Crisis
- Investing After the S&P 500's Rebound
- Charlie Munger's Advice on Buying Stocks
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