The time to buy has arrived! So what and how should you buy?
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The Nikkei Stock Average has fallen by about 1,200 yen (5.7%) over the past week, hitting a year-to-date low. In the market, talk of entering a bear market is circulating. However, precisely because many people are pessimistic now, you can buy “good stocks” at a “low price.”
There is no doubt this past year has shown this to be the best timing
As I always say,the period when investors are pessimistic is exactly the best buying opportunity for value investors. Ignore the decline of stocks you already hold and steadily buy with the funds you have left.
Of course, I cannot say this drop will stop here. However, at leastthis is the most advantageous timing in the past year. If you do not think about selling hastily, you can continue buying prudently at more advantageous timings—that is true long-term investing.
Because stock prices have fallen, more stocks appear undervalued in terms of metrics such as PER and dividend yield. Rather,all kinds of stocks tempt you with their allure, making it hard to choosewhich ones to buy. Which stocks should you buy?
Targets are growth stocks and high-dividend stocks
If you buy quality stocks at affordable prices and hold them, eventually any stock will yield a profit in the long run. But that alone only promises returns that beat the average by a small margin.
So-called large cyclical stocks respond straightforwardly to earnings.The earnings decline of highly cyclical stocks will come in sync with the economy, so there is no need to rush in now. The buying opportunity comes after earnings deteriorate.
In a bear market, the stocks that rise first are those that previously climbed on expectations.Expectations move up or down greatly depending on investors’ psychology. When investors are pessimistic, stocks become undervalued more than necessary.
Only the expectation without substance is not something to buy at any time. However,if there is solid basis for significant growth and the stock is being sold at a fair price, it may explode in the future as expectations recover and earnings expand.If a stock could become a 10-bagger, it would be such a stock.
For example, a mid-sized growth stock with sound finances is being sold at a price where its PER falls below 10 times.If things go well, earnings would expand substantially; even if not, the downside is limited. Similar quality, growth, and undervaluation stocks can still be found.
For investors who seek dividends, this is also an excellent buying opportunity.If the stock is less tied to the economy, you can buy based on its high yield without worrying about deteriorating earnings.
Gradually buy in installments
Most importantly, in a bear market, prices fall largely independent of intrinsic value. Buying at undervalued prices is fine in the long term, but it is preferable to buy as cheaply as possible. To achieve this,do not buy all at once; buy gradually.
For example, if you want to buy 1,000,000 yen worth of a stock and the current price is 2,000 yen, first buy the minimum 100 shares (200,000 yen), then accumulate as it falls to 1,900 yen, then 1,800 yen. If it falls to 1,600 yen, you can buy 900,000 yen worth at a unit price of 1,800 yen.
After finishing buying, just close your eyes and wait for it to rise. If you haven’t finished buying yet and it has risen, you can accept that as well. If buying one by one is tedious, you can place a limit order for the longest specified period and let it ride thereafter.
If you want to buy growth stocks but lack funds,selling the stocks you currently hold can be an option. In the long term, consider which among the stocks you want to buy and the stocks you hold seems more likely to grow its earnings. If the stock you want has a higher expected value, that provides a strong reason to switch. This is how youstrengthen your portfolio, which is necessary for long-term investing.
In the face of fierce market swings, your nerves may falter, but acting rashly can trap you in a swamp.Now is precisely the time to stick to the basics, calmly buying inexpensive stocks; this will lead to future profits. Above all, continuing to invest without quitting is the best remedy.
※This article is an excerpt from a members-only report dated December 22, 2018.
