It is natural for investors to feel a degree of pessimism regarding the stock market’s current prospects. The highest level of inflation in 40 years, rising interest rates and heightened geopolitical risk mean the outlook for the economy, and for investors, is very downbeat. This has been reflected in the S&P 500’s performance in recent months, with it declining by 22% year to date.
However, investors must not forget the stock market has an extremely long track record of delivering relatively attractive returns. For example, it has generated an annualized return of around 10% since 1929 despite experiencing 26 bear markets during that time.
Value investing
Indeed, investors who have been able to capitalize on the stock market’s booms and busts are likely to have generated even higher returns over previous years. Their ability to take a long-term view and remain upbeat about the stock market’s prospects during its downturns may have enabled them to purchase high-quality companies when they traded at low prices.
Investors who are able to do likewise amid current economic uncertainties could capitalize on a likely long-term recovery. Doing so would follow the advice given by the father of value investing, Benjamin Graham, who once said: “To be an investor you must be a believer in a better tomorrow.”
A realistic assessment
Of course, being blindly upbeat can cause problems for investors. For example, they should not only see the good in companies. Rather, they should make a realistic assessment of the financial standing, market position and value of companies to determine whether they offer investment appeal following price declines.
For example, investors may be upbeat about a company that is expected to experience increasingly difficult operating conditions, but has low debt, strong brands and trades for less than its intrinsic value. It is very likely to enjoy a sound long-term recovery as its operating environment improves. By contrast, weaker companies with large debt loads and a lack of differentiation may be extremely unattractive in a period of tightening monetary policy – even if their market values presently offer wide margins of safety.
Staying the course
It can be difficult to remain upbeat about the prospects for a portfolio while share prices are falling and other investors are pessimistic. However, the average length of a bear market has historically been less than a year. Therefore, a bull market is very likely to never be too far away. With the stock market having recovered from every one of its previous bear markets, its chances of doing likewise in the coming years seems high.
By adopting a positive outlook on the long-term prospects for the stock market, it may be easier to use a value investing strategy that seeks to utilize a contrarian mindset. Doing so may not fit in with the views of other investors, but has a long track record of success as the market’s booms and busts have played out.
