The S&P 500 may have gained around 25% since its March 23 lows, but the index is still over 15% down from its 2020 high. Its near-term prospects continue to be highly uncertain owing to the probability of a sharp reduction in economic activity in the short run.
Investing at such a time can be difficult for investors. However, following the guidance of value investors such as Baupost Group chairman Seth Klarman (Trades, Portfolio) may increase your capacity to capitalize on low valuations on offer across the stock market.
Short-term price changes
Buying stocks at any time can lead to short-term losses. However, purchasing stocks today could lead to substantial losses for investors due to a highly uncertain and changeable economic outlook.
According to Seth Klarman (Trades, Portfolio), value investors should not be concerned about the prospect of a short-term decline in a stock’s price. Klarman once said, “I can buy this thing (a company) for a huge fraction of what it's worth. What am I worried about if it goes down a little bit more?”
Market volatility
Like many successful long-term investors, Klarman seeks to use market volatility to his advantage. He does not view volatility as a bad thing, but rather an opportunity to purchase stocks when they offer wider margins of safety.
Worrying about extreme market volatility during stock market downturns is unlikely to improve your returns. It could even make you more inclined to avoid purchasing stocks. Worse still, it may lead you to sell companies that have recorded stock price declines due to the fear of experiencing further losses.
Investing aims
Stock market downturns can cause investors to change their strategy to try to accommodate new information regarding the outlook for the stocks they hold.
For example, containment measures that are currently in place may prompt you to use different methods than usual when seeking to value a business. This may complicate your overall strategy and lead you to lose sight of the key reasons why you started investing.
Therefore, remaining focused on your basic investment aims and principles throughout a market downturn could be a simple, but effective, strategy. As Klarman once said, “We buy when the market is down. We sell when it's up.”
Avoiding unattractive stocks
A period of weakness for the economy may lead to difficult operating conditions across a range of sectors. Therefore, some companies may currently be trading on low valuations that are entirely warranted by their opaque financial outlooks.
Avoiding those companies could be just as important as unearthing the best value opportunities in the stock market. After all, many stocks trade cheaply for a reason.
Value investing is based not only on the price of a stock, but also on its quality. By seeking to buy the best quality stocks you can find at attractive prices, rather than purchasing the cheapest stocks around, you could access more appealing risk/reward opportunities.
Read more here:
- Benjamin Graham's Tips on Analyzing Stocks in a Market Crash
- Warren Buffett's Advice From the Financial Crisis
- Investing After the S&P 500's Rebound
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