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Warren Buffett on the Appeal of Unpopular Stocks

Beaton-down stocks can offer significant long-term return potential

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May 23, 2022
Summary
  • Investing in the stock market could become less popular due to its recent decline.
  • This may present long-term buying opportunities for contrarian investors.
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Investing in the stock market has become increasingly popular over the past couple of years. Indeed, around 15% of all stock market investors in 2021 were new to equity markets, having purchased their first shares in 2020 or later. Seemingly attracted by new record highs for the S&P 500 amid a period of ultra-low interest rates, investing became an increasingly mainstream pursuit.

Now, though, investing in the stock market could become far less popular. The S&P 500 has already fallen by 17% this year, while likely future increases in interest rates could have a negative impact on valuations. Other risks, such as the war in Ukraine, high inflation and economic uncertainty, could act as further negative catalysts on the stock market’s performance.

Investors who have not lived through previous bear markets or downturns, and experienced first-hand the potential for recovery, may easily be scared out of their investments.

Buying opportunities

Of course, investors who have bought and sold shares for many years are very unlikely to follow suit. The S&P 500 has experienced 26 bear markets since 1929. Crucially, it has recovered from each of them. And while things could get worse before they improve over the coming months, new record stock market highs are very likely to be achieved in the long run.

As a result, a decline in the popularity of stock market investing could present a significant buying opportunity for long-term investors. They may be able to capitalize on lower valuations caused by weaker demand for stocks. In some cases, high-quality companies with solid balance sheets, strong cash flow and high historical returns on equity may be priced at levels that include wide margins of safety.

This viewpoint has previously been discussed by Berkshire Hathaway (

BRK.A, Financial) (BRK.B, Financial) Chairman Warren Buffett (Trades, Portfolio), who said: “Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can’t buy what is popular and do well.”

Adopting a contrarian view

Clearly, adopting a contrarian view to your peers is a tough task. Their fears and concerns about the future prospects for the stock market may subconsciously influence your own view and cause you to miss out on buying opportunities or, worse still, sell high-quality companies at low prices.

Therefore, it is crucial to ignore the views of other investors – especially those who have a short-term outlook or who have not experienced multiple booms and busts in their career.

One way of achieving this is to follow an investment checklist. It does not have to be particularly comprehensive, in terms of covering all considerations before buying a stock, but needs to be thoroughly followed. Doing so will ensure that you use facts and figures, as well as logic, to make investment-related decisions instead of going off of emotions such as fear, as per many other investors during a market downturn.

Undoubtedly, paper losses could be experienced in the short run if the stock market’s decline continues. But history shows the stock market follows a cycle. The best time to buy has historically been when others are selling and the idea of buying shares is an unpopular one, rather than when everyone is doing the opposite.

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Disclosures

I/we have no positions in any stocks mentioned, and have no plans to buy any new positions in the stocks mentioned within the next 72 hours. Click for the complete disclosure
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