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As a growth investor, the ongoing stock market correction has been pretty unpleasant. My portfolio experienced a double-digit drop and still has a long way to go before it will fully recover.
However, suffering through such volatile periods is the cost of investing in shares. And it’s a good reminder that prices don’t always go up.
Yet, as frustrating as these past 18 months have been, I haven’t lost any sleep. My focus is on the long run. And in my eyes, the companies in my portfolio are fundamentally sound enterprises with explosive potential.
That’s why I’ve been regularly putting aside money each month to snap up even shares at today’s low prices. And, so far, it’s proven to be a lucrative move.
Earnings are still pouring in for the third quarter of 2023. But many of my companies have beaten analysts’ pessimistic expectations, translating into multiple double-digit surges in share price.
Nevertheless, plenty of top-notch stocks still look underappreciated. And as billionaire investor Warren Buffett has perfectly demonstrated, investing in high-quality businesses below their fair value can unlock monumental wealth in the long run.
Focus on high quality at cheap prices
While the stock market is no stranger to volatility, corrections of this magnitude are pretty rare. In fact, investors haven’t seen such a severe drop in valuations since the financial crisis. And that was 15 years ago.
While I’m certain such volatility will re-emerge, it could potentially be another decade. And so now might be the perfect time to start snapping up cheap shares.
However, not every sold-off growth stock is a bargain. Corrections are fuelled by fear. But sometimes concern is justified. The macroeconomic landscape has shifted significantly. Debt is no longer near-free. And companies that have grown dependent on external financing are feeling the pressure of higher interest rates.
That’s why when investing in a business I place so much emphasis on the generation of free cash flow. This is the money a company has to spare after paying off its operating and capital expenses. And it’s what creates the cash on a balance sheet organically.
This liquidity provides flexibility. And it’s what enables a business to become, or remain, financially independent. As such, even the businesses in my portfolio with higher debt loads are seemingly at risk, even with interest rates jumping from 0.25% to 5.25%.
Meanwhile, the few firms which are unprofitable aren’t at risk either. Yet investors have been selling them off regardless after falling prey to the fear of loss. And that’s how long-term buying opportunities are created.
Investing during volatility
Every stock market crash and correction throughout history has eventually led to a new bull market. And during the recovery, some of the best returns have been achieved. Unfortunately, knowing when this recovery will begin is near impossible.
That’s why drip-feeding capital into the markets is my preferred strategy during volatile periods. Should a top-notch stock continue to tumble, I’ll have more money at hand to snap up even more shares at a better price.
Of course, it’s important to keep tabs on how companies are operating. Surprises can emerge overnight, and a once-thriving company may evolve into a value trap.
But by staying disciplined and informed, investors can leverage a correction to try and propel their portfolios to new heights.
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