We all know stockmarkets move up and down, sometimes quite dramatically.
During times of falling share prices there is a natural tendency to sell your existing share investments, or a reluctance to invest, because of a fear that share prices may fall further.
These reactions are understandable, however a disciplined, value oriented investor should view this pullback as a potential opportunity. After all, share prices have fallen and dividend yields have increased, and in overall terms “value” has improved. Its no different to buying a house — you look to buy a house at the lowest price, not the highest, and investing in shares should be no different.
Of course share prices may continue to fall, however over the long term companies which are consistently increasing profits and are in a healthy financial position will recover in price, and over the long run will continue to rise in value.
During times of falling share prices, we would encourage you to keep focus on the fundamentals, and look for strong (healthy, performing) companies whose share price has fallen below fair value as potential investment opportunities.
In terms of Simply Wall Street, we suggest you take this opportunity to look at:
Value — look for companies where the share price is substantially below the fair value, or in other words are priced at a discount to their fair value. Search for snowflakes where the Value axis is expanding! (remember as share prices fall, value generally improves).
Health — look for companies with a high health rating on the snowflake, in particular those with no, or low, levels of debt and high levels of income available to service debt. The health axis does not change as a result of share price movements.
Performance — we favour high performing companies both on a historical basis and those where future forecasts are positive. Our past and future performance axes will highlight strongly performing companies for you.
Dividends — with falling share prices, dividend yields will rise (assuming dividends are maintained). While investment decisions should not be made on the basis of dividend yields alone (more on that in another blog), an increasing dividend yield is an added bonus.
So in summary don’t get carried away with the fear and emotion of the market. Keep your focus on company fundamentals, adopt a longer term view and use this downturn as an opportunity to look for potential investment “bargains”.
While it is impossible to predict when the market will recover, over the long term, high quality businesses will continue to increase in value regardless of the short term vagaries of the market.