The current stock markets around the world are in great turmoil. Markets are experiencing a new wave of uncertainty with abnormal highs and lows every other day. The confidence level of many investors is at a new low. In the shadow of prevailing uncertainty in the markets, many investors may refuse to participate in the market instead of buying shares.
However, under the same roof of uncertainty, a group of seasoned traders are closely watching the market for a different reason. They have their own vested interests in a falling market. But it’s not necessarily the bears, because this group is not “shorting.” Their trading gurus taught them to play the long term and follow the age-old strategy of “buying low (during a panic) and selling high (during a bull market) in order to maximize their profits when they later sell in a rising market. So, they have already concentrated on certain stocks that have been sifted through a very tight net of quality control, except for price.
We cannot categorize these traders as day traders or swing traders. In fact, they are not traders in a sense because they do not trade regularly. They are a completely different breed that have developed a good nose to sniff out their supply pot! The ingredients needed to make it delicious are given below for your benefit:
- Shares are traded below book value:
Simply put, stocks trading below their book value will be bargain hunters. Book value is the value at which an asset appears on a company’s balance sheet. In other words, it is the total value of the company’s assets that shareholders will theoretically receive in the event of the company’s liquidation. Therefore, this should be seen as an opportunity to buy stocks in an uncertain market. These investments will yield significant returns whenever the market rebounds.
- Stocks with a low debt-to-equity ratio:
When checking the “Fundamentals” of a company, a savvy investor chooses stocks of a company whose “Debt-to-Equity Ratio” is “below one” (-1), this indicates that the company has a lower debt burden or if the company is rich in cash, then it is likely she can enjoy “zero debt”. Such companies are always good and have free money to pay interest on loans. If a company’s key metrics show that its “debt-to-equity ratio” is greater than one (+1), it means that the company is using debt to finance its assets rather than equity. Therefore, companies that have “zero debt” should aim to accumulate during market downturns.
- Buying shares of blue chips:
The safest and most time-tested strategy for the medium to long-term investor is to buy blue chip stocks even when the markets are falling. Once the markets consolidate and recover, the first stocks to move higher will be the blue chip stocks that make up the index or are heavily weighted. Whenever there is an increase in the indices, these stocks also follow them.
Smart investors are not afraid of falling markets and continue to invest wisely. The strategy explained above has been used by several investors who could not stand the stress and strain of daily participation in the stock market. In general, this method works well for investors.
Warren Buffett is the best example of someone who made the best use of falling markets and the investment principles described above to create his world famous Berkshire Hathaway.