Yahoo Finance How To Select Stocks When the Market Is Bad
In a bad stock market, even good stocks trade down in price, sometimes significantly so. This can make it tough for the average investor to select stocks when the market is bad, as at least for a while, it will likely feel like everything they touch becomes an instant loser. But if you have the right mindset and temperament, a bad market can actually boost your returns over the long run.
Here’s a look at what it takes to succeed during bad markets, the type of attitude you should adopt and some real-world examples of stocks that suffered during market corrections and became long-term winners.
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How a Bad Market Can Be an Opportunity
You’ve probably heard the Wall Street expression that it’s “time in the market, not timing” that generates long-term wealth. But what you may not know is that it’s during times of bad markets that wealthy investors go to work, taking advantage of the opportunity.
As the so-called “Oracle of Omaha” himself, billionaire investor and CEO of Berkshire Hathway Warren Buffett famously said, “Be fearful when others are greedy, and greedy when others are fearful.” What Buffett means by this is that when others are panicking and selling good companies at cheap prices, that’s when astute long-term investors should step in.
If you have a multi-decade investment horizon, such as if you’re saving for retirement, never let your emotions take over and force you to sell at the wrong time. If you own good companies, consider buying more when their prices are low, not selling what you already own.
Read More: 10 Valuable Stocks That Could Be the Next Apple or Amazon
How the Stock-Picking Process Works During Bad Markets
Investing in the stock market can be a highly emotional process. It’s simply human nature to want to sell stocks that are losing money and to buy stocks that are going up in value. But this is the exact opposite mentality that you should have if you’re looking to build long-term wealth.
Here’s how Buffett, one of the world’s most successful investors, describes right and wrong thinking when it comes to the stock market: “If they buy a stock and they think if it goes up it’s wonderful, and if it goes down it’s bad. We think just the opposite. When it goes down we love it, because we’ll buy more. And if it goes up, it kills us to buy more.”
In other words, when the market is bad, that’s the time that you should consider jumping into the stocks that you’ve been wanting to buy. And if you already own them, it’s a good time to buy more, assuming you still believe in their long-term success. That way, you can lower the average cost that you pay for the shares, giving you bigger gains going forward.
Real-World Example of Bad-Market Stock Selection
The pandemic is the most recent example of a huge market selloff that turned out to be an incredible buying opportunity. While the Dow Jones Industrial Average was selling off by thousands of points per day at one point, many investors panicked and unloaded their shares. But those who bought instead are sitting on huge gains, depending on the stock or index they picked.
Take market leader Apple, for example. On Feb. 14, 2020 the stock traded at $81.44. But in the midst of the pandemic bear market, shares fell as low as $56.09 on March 23, a rapid collapse of over 30%.
Imagine you bought 100 shares at $81.44, for a net cost of $8,144 (with no commissions or fees). By March 23, your investment would only be worth $5,609, which would be tough to see. However, if you simply held your shares until May 10, 2024, your $8,144 investment would have risen to $18,301, a gain of 125% even after suffering through that massive selloff. If you had managed to buy at the pandemic low of $56.09, your combined investment of $13,757 would be worth $36,610 today, a 166% gain.
How To Pick Stocks When the Market Is Bad
If you’re to follow the example of famous investors like Warren Buffett, Jack Bogle and others, you’ll want to pick up additional shares of great companies when they trade at lower prices. If you’re already invested in the market, make sure that the companies you own still have bright future prospects and then step in and buy when their share prices go on sale. If you’re simply researching companies and not yet in the market, the time to buy is when they sell at fair or cheap prices.
Just make sure you do your research and buy businesses with viable long-term prospects, not random companies that happen to be cheap. As Buffett himself put it, “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”
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This article originally appeared on GOBankingRates.com: How To Select Stocks When the Market Is Bad
