Finding cheap stocks to buy is not difficult at the moment. But choosing wisely is tricky. The coronavirus pandemic continues to plague individuals and the global economy.
As UK death rates continue to rise and Covid-19’s testing capacity is slim in the field, there is uncertainty. And as the pandemic continues to spread without a vaccine in sight, the extent of the economic damage caused is not yet clear.
All of this shook the UK FTSE in recent weeks, but many analysts believe the worst is yet to come. If this is true, then we might find some of the UK’s most qualified companies slipping into good business territory. Existing shareholders no longer want their portfolios to decrease in value. But a collapsing market can offer a great opportunity for those looking to get started in stock investing.
Billionaire investor Warren Buffett has made several fortunes. Whenever he found himself in a stock market crash, he made up for the losses by making quality purchases from undervalued companies.
Don’t forget to diversify!
Warren Buffett’s advice on portfolio diversification can confuse beginners. While most investment advisers advocate portfolio diversification, Buffett once said: “Diversification is a protection against ignorance. It doesn’t make sense if you know what you’re doing. “
Indeed, if you have done your homework and are investing in sectors that you understand, random diversification should not be necessary.
However, during a stock market crash, I think it’s obvious that diversification is important. The sectors most visibly affected by the virus are airlines, travel and entertainment. If you had only invested in these three sectors, it could destroy your wealth in one fell swoop. Similarly, if you were only invested in oil, you would be in trouble because the oil majors sink under the weight of the price of oil.
I understand Buffett’s point of view on diversification. But I think it is important that beginners do not put all their eggs in one basket. Many different sectors are easily accessible to investors, so it’s easy to create a diversified and balanced portfolio.
The world’s eye is on pharmaceuticals, for example, as we wait breathlessly for whispers of a vaccine or miracle drug to crush the coronavirus. Meanwhile, as global tensions rise, defense is an area which I think could prepare for future growth. These are the two sectors I would consider adding to a diversified portfolio.
Overvalued to undervalued
Some of the UK’s most popular FTSE 100 companies still have a high price / earnings ratio. It is therefore possible that consumers will lose their confidence in stock prices at a price higher than what they are worth.
Sometimes a market correction is necessary to bring the overvalued stocks back to earth. This means not only for a realistic value state, but for an undervalued state. At this point, overvalued stocks become cheap stocks to buy.
I think a stock market crash is a great time for beginners and seasoned investors to do their homework. Look carefully for the companies that interest you. Then you can confidently buy stocks in quality companies at great prices. After that, just wait for confidence (and dividends) to return and watch their prices rise.
It’s ugly there …
The threat posed by the coronavirus epidemic has frightened global markets, causing share prices to falter.
And with the Covid-19 virus starting to spread beyond China and Italy, it seems very likely that the bull market we have taken advantage of over the past decade could finally end.
In such a context of market anxiety, it is not surprising that many investors start to panic. (After all, no one likes to see their portfolio values drop significantly in such a short time.)
Fortunately, The Motley Fool is here to help, and you don’t have to deal with it alone…
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The opinions expressed on the companies mentioned in this article are those of the author and may therefore differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. At The Motley Fool, we believe that taking into account a diverse range of ideas makes us better investors.