Although we can’t know for certain when a bull market will come, we can know with certainty that it will come at some point. Historically, a bull market always follows a bear market, even the worst market plunges.
The last time the market had back-to-back annual losses was in 2002, when it actually posted three annual losses in a row. And it was the third and final annual loss, in 2002, that was the worst of the three — with a 22% drop on top of 9% in 2000 and 12% in 2001. Investors must have been pretty shaken up at that time. But the market roared back with a 28% increase in 2003, and has long since erased all of those losses.
That’s why it’s so important to have a long-term mindset as an investor. And before the bull market comes back, don’t make this expensive mistake.
Being fearful when others are fearful
One of investing legend Warren Buffett’s most famous sayings is “Be fearful when others are greedy and… be greedy only when others are fearful.” He gave that nugget in the 1986 shareholder’s letter to explain why he wasn’t buying too many stocks at a time when the equities markets were soaring. Here’s some more context to explain what he was saying.
When companies with good economics and good management sell well below intrinsic business value — stocks sometimes provide grand-slam home runs. But we currently find no equities that come close to meeting our tests. … Occasional outbreaks of those two super-contagious diseases, fear and greed, will forever occur in the investment community. The timing of these epidemics will be unpredictable. … Therefore, we never try to anticipate the arrival or departure of either disease. Our goal is more modest: we simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.
Taking a page from Buffett’s playbook, it could be costly to miss out on the deals that abound right now in this bear market because investors are fearful. There are many excellent stocks, some Buffett stocks in particular, that look very cheap. But they won’t stay cheap in a bull market, and it’s precisely the undervalued stocks that have the best chance of providing the grand-slam home runs.
What stocks should you invest in?
One characteristic of this bear market is the flight to safety. There was a lot of fear last year as inflation soared and growth stocks lost momentum. Investors piled their funds into safe stocks, and both value stocks and dividend stocks outperformed the broader market.
^SPX Data source: YCharts
Buffett’s aphorism isn’t just to buy cheap stocks, and it also doesn’t mean to buy plunging growth stocks. Investing in value stocks is what Buffett does best. This strategy suggests that now is the time to put your money to work, so whenever the bull market does return, you’ll see your holdings appreciate in value.
What does it mean to be undervalued?
The definition of an undervalued stock is somewhat relative, as is any kind of valuation. However, all definitions include the idea that a stock is trading at a price below the value of what it can provide for shareholders. For two good examples of what might be undervalued stocks, let’s take Buffett favorites Visa (NYSE: V) and American Express (NYSE: AXP).
Although they have some things in common because they are both credit card processing networks, American Express is different from Visa because it acts much as a bank does by issuing credit to its customers. As a simple network, Visa enjoys an incredible profit margin of more than 50% in a given quarter. American Express, though, has lower margins because of its bank-like features, which includes things such as making provisions for credit losses. Visa’s price-to-earnings ratio of 31 is almost doubt American Express’s, but investors give it that premium because of its higher profit margins.
On the other hand, American Express, trading at only 16 times trailing-12-month earnings, may be undervalued considering its generally strong profitability and future earnings potential. Both of these stocks are trading well below their five-year averages.
AXP PE Ratio data by YCharts
If you buy either of these stocks today, you can get them at a substantial discount to their average trading values.
Don’t make the mistake of letting the market’s fear become your fear. Otherwise, you won’t be able to benefit from incredible discounts on these and other amazing stocks that will cost you much more when a bull market returns.
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American Express is an advertising partner of The Ascent, a Motley Fool company. Jennifer Saibil has positions in American Express. The Motley Fool has positions in and recommends Visa. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
