There’s a good chance the recent stock market correction will provide some decent buying opportunities for long-term focused investors. And I think that because most setbacks, bear markets, corrections and crashes do.
We only have to listen to the stories of gains many investors have made in the months and years following such events. But, of course, those gains aren’t on offer unless we act by buying shares when they undervalue businesses.
Buying when the news is gloomy
Often, the time to buy feels more like the time to sell! And that’s because the keenest valuations arise when the news is at its gloomiest. But that doesn’t stop seasoned and successful investors such as billionaire Warren Buffett from loading up with stocks when there’s a crisis.
And in recent years we’ve had many opportunities to copy his approach. For example, this century we had the tech-wreck bear market when the dotcom bubble burst in 2001. Then we had the financial crisis and subprime mortgage fiasco around 2008. And the coronavirus crash in 2020, followed by the war in Ukraine now in 2022.
One thing is certain, in the coming years there will likely be more bear runs for stocks. And that’s because history is littered with them. And for me, the key to buying decent stocks during such periods is to focus on the quality of the underlying business.
Sometimes good stocks can be pulled down in a falling market even if they don’t deserve it. And others will suffer perhaps temporary setbacks to their businesses. And the stock price may go too low and understate the value of a company.
A 3-step plan
So the first step I’d take to boost my long-term returns from the current stock market correction is to search for undervalued stocks. And that means a focus on the quality of underlying operations. I could be looking at a bargain if the current stock price delivers a valuation lower than what might be expected for a company’s prospects.
The second step is to establish the presence of an economic advantage within a company’s business. Buffett often refers to that as an economic moat. And just like a moat around a castle deterring invaders, the economic moat makes it difficult for would-be competitors to take market share from a business.
Sometimes moats come in the form of strong brands. Or it could be a geographical advantage, network strength, high switching costs for customers, efficient scale of operations, high entry costs for competitors, and other reasons. Such economic advantages could help a business navigate through short-term difficulties and thrive when the recovery arrives.
The third step I’d take is to adopt a long-term focus after buying stocks during a crisis. Even the war in Ukraine will end at some point. And businesses will likely adapt to whatever the new realities of the world are afterwards. And in the past, the stocks of strong businesses and the markets have recovered and progressed.
However, history is no reliable guide to the future. And even following these three steps doesn’t guarantee a positive investment outcome. Nevertheless, I’m hunting for the stocks of quality businesses right now to hold for the long term.
Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
