Many investors will despair at the poor performance of their stock market portfolios recently. Across the pond, the S&P 500 and Nasdaq Composite are in bear markets. Closer to home, the FTSE 100 is where it was five years ago and the FTSE 250 has taken a hammering over the past year.
However, as a dedicated follower of the long-term Foolish approach to investing, I view the brutal sell-off as a golden opportunity for me to buy cheap shares.
Lessons from Warren Buffett
Stocks are notoriously volatile assets. In good times, this means investors celebrate as their wealth compounds.
However, when share prices fall rapidly, it can be hard to stay disciplined and keep long-term goals in mind. It’s in times like these I seek guidance from arguably the world’s most successful investor, Warren Buffett.
As a disciple of Benjamin Graham, the Berkshire Hathaway CEO is famed for his value investing philosophy. Buffett invests in high-quality businesses that are undervalued before possibly selling them later when they reach what he considers their deserved market value, or simply holding them for many years.
Be fearful when others are greedy and be greedy when others are fearful.
Berkshire Hathaway Chairman’s letter, 1986
Stock market corrections can provide excellent opportunities to buy cheap shares while valuations are down.
Buffett’s favourite holding period is “forever“. He recommends that if investors don’t want to own a stock for 10 years, they shouldn’t think about owning it for 10 minutes.
So where can I find long-term bargain buys in the stock market downturn?
Looking stateside, mega-cap tech stocks have taken a beating. Some of the 21st century’s most successful companies look tempting to me after substantial haircuts. In particular, I’m eyeing up Apple, Alphabet, Amazon, and Microsoft.
There are echoes of the dotcom crash in these numbers. For example, Microsoft stock took 16 years to recover from its December 1999 peak. Today, it’s worth three times that.
If I’d invested $1,000 a year later on 10 January 2001, I’d have $8692.89 today. That’s a 769% return over 22 years, excluding dividends. Not bad, and a good starting point for my goal of getting rich.
Granted, there’s a risk share prices could fall further if the US economy enters a recession, or if the Fed hikes interest rates aggressively.
Nonetheless, I believe they’re great companies with bright futures. I see 2023 as a good year to buy these shares at unusually cheap prices.
There are also many cheap UK shares. One that looks good value to me currently is Scottish Mortgage Investment Trust. It invests in growth stocks from public and private equity markets globally. The share price is down 34% over 12 months.
The fund faces similar risks to US mega-caps from possible global recessions and restrictive monetary policy. Nonetheless, the trust has an impressive track record of delivering astronomical returns for shareholders.
Although past performance doesn’t guarantee future results, I’ll buy more Scottish Mortgage shares this year.
A chance to get rich?
Historically, big stock market downturns are relatively infrequent. Quality companies are more often in an uptrend than not.
With that in mind, I’ll be deploying spare cash into cheap shares this year to try to — eventually — get rich.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Charlie Carman has positions in Berkshire Hathaway, Alphabet, Microsoft, and Scottish Mortgage Investment Trust. The Motley Fool UK has recommended Alphabet, Amazon.com, Apple, and Microsoft. 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.
Motley Fool UK 2023