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Many UK stocks took a bashing in 2022. And the year was dominated by the geopolitical and economic upheaval caused by the war in Ukraine.
However, successful contrarian investor David Dreman wrote: “A market crisis presents an outstanding opportunity to profit because it lets loose overreaction at its wildest.”
Dreman’s book Contrarian Investment Strategies details his approach to investing in such conditions. But his main point is that share prices tend to go too far down in a crisis and end up understating the true value of a business.
Upside surprises
Yet Dreman has more courage than me. His approach involves buying stocks when the mood is at its darkest — perhaps even when share prices are still falling. He said in the book he goes into a crisis investing with his hard-hat on. And he diversifies across several shares in case he picks a dud that fails to recover.
But before investing, I like to see some evidence that the market and individual stock prices may be near to the bottom. And the last two or three months of 2022 provided the clues I was looking for.
Indeed, despite the precipitous share price falls, many underlying businesses kept releasing good trading figures and optimistic outlook statements. And the market was surprised. I can see that by the way those news releases caused catch-up bounces for many stocks.
And that kind of market action makes me optimistic that a new bull market is beginning. After all, during a bear market, good news tends to be ignored and share prices just keep on grinding lower.
Meanwhile, to my reading of the situation, the general economic and geopolitical storm clouds are beginning to break up a little. And the first chinks of light have begun to appear in the sky. So I think conditions look set to support businesses as we move into 2023.
The big market turns
So, for me, now is the time to act. And another great stock trader and investor called Jesse Livermore made millions by aiming to spot the big turns in the market. He said in his book How to Trade in Stocks that he aimed to be in shares as close to the beginning of a big move as he could. But he waited for evidence of the turn before buying any stocks.
I reckon there’s mileage in aiming to combine the philosophies of Dreman and Livermore. And that’s probably best described as taking a contrarian approach to trend following. In other words, I’d aim to find undervalued and solid businesses now, despite all the negative general news. Then I’d aim to stick with their shares as the underlying businesses recover and grow in the years ahead.
Nobody knows for sure whether there will be a bull market for UK stocks in 2023. But I’ve been busy researching and buying UK stocks now on an individual basis. I could be wrong and it’s possible for me to lose money. Nevertheless, I’m optimistic about the prospects for my underlying businesses in 2023 and beyond.
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