The FTSE 100’s performance in 2020 has been hugely disappointing for many investors. However, for value investors who aim to ‘buy low’ and ’sell high’, it could prove to be a buying opportunity.
In past stock market crises, value investors such as Warren Buffett have been able to purchase high-quality companies at low prices while other investors are downbeat about their prospects.
Although there may be further declines ahead for the FTSE 100, there appear to be numerous buying opportunities available today which could improve your long-term financial outlook.
Risk/reward
There are clear short-term risks facing investors at present. The impact of coronavirus on the world economy’s performance is a known unknown. Similarly, weakness in the oil and gas industry could have knock-on effects for the financial services sector and the wider economy. As such, the value of your investments may fall in the near term.
However, value investors such as Buffett take a long-term view on their holdings. They’re unlikely to be overly concerned about the performance of their portfolios in the coming months. Instead, they’re likely to be contemplating how they can grow their portfolio size over the coming years.
One way to achieve this goal is to buy high-quality businesses while they offer wide margins of safety. Not only can this reduce the risks facing an investor (since they’re purchasing a stock below its intrinsic value) it may also lead to high rewards in the long run as prospects for the world economy improve.
Economic moats
As well as buying shares when they’re cheap, value investors focus on the quality of a business. One means of doing this is to assess a company’s economic moat, or competitive advantage.
A business, for example, may have a lower cost base than its rivals, or benefit from strong brand loyalty. It may have greater financial strength, or a more diverse set of operations. All of these factors could make it a more attractive investment proposition than its peers. They also increasing the chances of overcoming short-term risks to post long-term capital returns.
Therefore, focusing your capital on higher-quality shares with wide economic moats could be a sensible move while the prospects for the world economy remain highly uncertain.
Fundamentals
Buffett has been hugely successful at developing a habit of buying while other investors are selling. He’s been able to purchase stocks for significantly below their intrinsic values over a long time period.
One reason for this is he focuses on the fundamentals of a business, and ignores investor sentiment. While this can be difficult when your portfolio is declining in value and the outlook for the world economy is challenging, it may help you to capitalise on the FTSE 100’s recent decline.
The index has always recovered from its various crises over the years, and value investors could be among those who benefit from its present short-term challenges.
