Whether we’re talking about an impending stock market crash or something less dramatic, it’s clear some of us feel that share prices are looking a bit frothy.
Last week, Sarah Breeden, deputy governor for the Bank of England (BoE), said the quiet part out loud: “There’s a lot of risk out there and yet asset prices are at all-time highs. We expect there will be an adjustment at some point.“
As a Fool, this is actually music to my ears. Let me explain why.
Like you, I’m trying to grow my wealth. Since holding cash in a savings account is a recipe for disaster, due to the eroding effects of inflation, I’ve turned to the stock market.
One way of potentially turbocharging performance in the latter is to buy individual company stocks when other investors are selling. By doing so, I can ride to the eventual recovery when people realise we’re not actually going to hell in a handcart.
This is why I believe a stock market crash or some “adjustment” is just the sort of thing any long-term investor should hope for.
Of course, this isn’t to say that going against the grain’s easy. News headlines full of doom and gloom always have the potential to make us think we’re making a grave error.
But we also know that – to date – the market has always rallied. And if it doesn’t, we’ll probably have more important things to think about than how our portfolios are faring.
When will this opportunity arise?
I’ll save you some time. No one person or organisation — including the BoE — knows when the proverbial will hit the fan. That’s just the nature of the stock market. The long-term rewards have been wonderful. But the path there has always been unpredictable.
This is why I keep a list of brilliant stocks I’d like to buy if they suddenly dropped in price. To paraphrase billionaire investment legend Warren Buffett, what could be better than buying “quality merchandise when it’s marked down“?
Personally, I like businesses with strong economic moats – things that separate them from the competition – and those that generate sky-high margins. Having a robust balance sheet with minimal (if any) debt can also help when navigating choppy economic waters.
One example of this has to be fantasy figurine maker Games Workshop (LSE: GAW). Thanks to global expansion, huge IP growth and fan loyalty, the FTSE 100 member has been one of the UK success stories over the last decade.
Just how long this momentum will last is open to debate. The fact that inflation’s creeping up again means that even the most dedicated hobbyist may need to cut back on their purchases. The current price-to-earnings (P/E) ratio of 34 also implies that investors’ expectations are already very high. And what do we know can happen when hopes begin to surpass reality?
