Talk of wars and potential wars fills the airwaves and internet as Russia continues its invasion of Ukraine. While the potential for a larger conflict grows, it’s important for value investors to remember the principles of value investing, look for profitable companies and stick to long-term investment goals. Even during times of war, panic-selling isn't a good idea.
Stocks vs. bonds
While the world collectively panics over a potential World War III, that doesn't mean now is the time to sell your stocks. Uncertain times can send stocks downward in the short term, but markets tend to shrug off the actual conflicts themselves. During World War II, large-cap stocks saw gains of 11.4%, while investing in small-cap stocks during those years netted investors an average return of 13.8%. In contrast, investors in long-term bonds during those years only saw a return of 2.2%.
Today, the economic environment is the inverse of profitable for bonds. Finding stocks of companies that are profitable now and likely to remain profitable even if a larger war breaks out is the better strategy.
Don’t time the market
If there’s a proverb to etch in stone for value investing, it’s “Don’t time the market.” Trying to find those elusive low days for buying and high days for selling would take a crystal ball.
Instead, steady investing through dollar cost averaging, that is, investing a set amount of money each month following your asset allocation plan, is the best way to ensure you get steadier returns in the long run.
Look at uninterrupted profitability
Value investors should look to invest in companies that are not only profitable now but have great possibilities of uninterrupted profitability in the future. Think of them as profit machines.
There are some stocks that have a near lock on sales. For example, Microsoft (MSFT, Financial) has a monopoly-like hold with products like OS and Office. In an inflationary environment, Microsoft has the ability to increase prices because of its lack of competition.
Exchange-traded funds in sectors such as consumer products, such as the Consumer Staples Select Sector SPDR (XLP, Financial), can be low risk and stable places to park cash, with supply chain issues being their main concern.
Watch for bargains
Good companies can get caught in a market’s downward slide. With the volatility the markets have experienced the past several years, value investors should have their eyes on solid companies they’d like to invest in should their share prices drop. Having cash to take advantage of bargain prices is advisable anytime, but especially in turbulent markets.
Remember the famous Warren Buffett (Trades, Portfolio) quote, "Price is what you pay. Value is what you get." Make sure that the shares you purchase are of companies that are not only profitable now but are likely to remain profitable, as recommended by GuruFocus founder Dr. Charlie Tian in the book “Invest Like a Guru.”
