While the FTSE 100 index and many individual shares are still well down from their highs this year, now is the time to take some action. It’s normal for the stock market to correct, or re-set, from time to time. But when it does, it doesn’t necessarily mean that operational progress in the firms backing shares has stalled as well. Often, we find that business is carrying on as normal with many companies, and maybe just the share prices had moved too far ahead leading to, perhaps, a slight over-valuation of the underlying firms.
So stock market corrections should be embraced and taken as an opportunity to buy decent companies at a better price. In other words, after a correction, you might be able to find better value in the markets. That’s certainly the approach of the investing masters, such as US-based Warren Buffett. But the key to success is to make sure you are buying shares in decent companies and not in rubbish companies.
Research Now’s the time to be doing your own research. Make sure the company you are interested in has a strong balance sheet, decent quality indicators, and a fair valuation. Ideally, you’ll find a record of growth in revenue, earnings and the dividend, and the directors, or City analysts, will be predicting growth in earnings, going forward.
It’s always useful if you can pin down a catalyst that will likely move earnings forward in the months and years to come, such as a fast-growing division, or a recent earnings-enhancing acquisition, or maybe a robust research and development pipeline.
Watchlist Once you’ve carried out your research on a company and you believe it looks like a promising candidate for your portfolio, I reckon it’s a good idea to put the company on your watch list. I find that organising my thoughts and research by managing such a watch list is a great way to apply some rigour to the investing process. Without one, it’s easy to forget what you’ve done and why you like a share, maybe at the crucial moment when it’s the optimum time to buy a particular stock.
Sticking your tickers on a watchlist can make you tune into a company and its progress without taking the risk of owning them. You’ll get even more familiar with the firm and its operations, which could give you more confidence when you judge the time is right to add the share to your portfolio.
Buy Warren Buffett once said that you pay a high price for a cheery consensus, or words to that effect. The opposite is also true, which means when things feel a little murky and uncertain, such as now, you are more likely to pay a lower price for the same merchandise.
So, with share prices depressed, you’ll likely get more of the underlying quality company that you’ve researched for your money. Eventually, you’ve got to have the courage of your convictions and buy shares in the companies you’ve researched. And I think it’s potentially a good time to do that right now!
Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.