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There are countless investment strategies to choose from, but buying and holding dirt cheap shares has long been one of the most successful. After all, capitalising on underappreciated businesses through a recovery can lead to handsome returns. And it’s precisely how major investors like Warren Buffett built their fortunes.
Finding cheap shares under normal market conditions can be quite the challenge. After all, when everyone is optimistic about the future, stock prices often end up being overvalued rather than under. That’s why 2023 is such a special opportunity.
With the stock market throwing a bit of a tantrum last year thanks to inflation, there’s still a lot of pessimism floating around. Despite this, there’s some early evidence that we might be in the middle of a stock market recovery. As such, now might be a fantastic time to build or bolster an investment portfolio with cheap shares.
However, this doesn’t mean investors should just snatch up any low-priced enterprise they can find. In some cases, the pessimism surrounding a business could be well-earned. Even some of the largest companies in the world aren’t immune to disruption. They could have weak financials or too much weight to quickly adapt to a rapidly changing market.
Therefore, after spotting undervalued shares, investors need to verify whether the underlying business is cheap for a reason. Suppose concerns surrounding the company stem from short-term hurdles rather than fundamental cracks in the business model. In that case, investors might be looking at a bargain.
Buying cheap shares with a record
Regardless of industry, one threat that every corporation is currently having to tackle is the volatile economic landscape.
Geopolitical conflict, inflation, interest rates, supply chain disruptions, and a cost-of-living crisis don’t exactly make for the ideal operating environment. And for management teams inexperienced with navigating such conditions, holding onto market share versus more seasoned competitors could be quite the challenge.
That’s why investors must pay attention to how a firm navigated tough times in the past. More importantly, seeking whether the firm emerged stronger or weaker than before. Knowing how to deal with economic instability can be a powerful competitive advantage. And it may be the difference between cheap shares delivering a mere recovery, or surging to new heights thereafter.
Nothing is guaranteed
Even if an investor successfully identifies a brilliant business trading at a discount, there’s no guarantee it will translate into a successful investment. In some cases, it can take years for a stock to truly reflect the underlying value of the company. And this level of patience can be hard to come by, especially since there’s always doubt of “did I get the valuation wrong”?
The latter is usually what trips up new value investors. And, of course, prematurely selling shares that were seemingly going nowhere is usually what ends up destroying wealth rather than creating it.
All of this is to say that buying and holding cheap shares isn’t an easy, get-rich-quick solution to building wealth. But when executed with discipline and finesse, it can pave the way for shining long-term gains.