Nobody knows when a stock (or the stock market) has hit bottom. People can speculate — and every analyst hoping for a little bit of television fame most certainly will — but no person, no matter how many past predictions they claim to have gotten right knows when a stock or the market has fallen as low as it will go.
And, while it’s tempting as an investor to wait for better prices, that’s a dangerous game to play. Yes, you might get a better price by waiting, but you also may find yourself waiting too long and missing an opportunity.
Down markets, bear markets, market crashes — whatever you want to call them follow no rules. A market correction takes overhyped companies that have under-delivered down in value while also dragging down shares of strong companies which have performed well.
As a long-term investor your job (or at least the best path to accumulating wealth) isn’t figuring out where the bottom is. Instead, it’s sorting out the companies that have a bright long-term future, where today’s price will hardly matter, from companies that saw their share prices drop because they don’t have sound business fundamentals.
That’s not always easy to identify when you consider some examples:
- Is Netflix (NFLX) – Get Netflix, Inc. Report a long-term market leader or a company with a huge spending problem it may never be able correct?
- Is Teladoc (TDOC) – Get Teladoc Health, Inc. Report a market leader or a company that’s too easy to copy?
- Will Zoom (ZM) – Get Zoom Video Communications, Inc. Class A Report continue to grow when the world returns to something closer to its pre-covid normal?
- Do retailers like Costco (COST) – Get Costco Wholesale Corporation Report, Walmart (WMT) – Get Walmart Inc. Report, and Target (TGT) – Get Target Corporation Report have a long-term supply chain/inflation problem or will the current concerns pass.
There are investors and analysts who feel both ways on any of the questions above. But, the best thing about investing is that you only have to put your money in stocks where you have deep convictions.
What Is a Long-Term Investor?
Long-term investors consider down markets as an opportunity to add to their portfolios. Before you can think about doing that, you have to think about what it means to be a long-term investor.
A long-term investor buys shares in companies they intend to hold for years — essentially forever. Usually, a long-term investor has an investing thesis — a reason why — they want to own the stock. That thesis should give the long-term investor faith in that stock even when the company’s share price drops.
Basically, a long-term investor checks in on their holdings to make sure the company has not made a change that causes it to diverge from that thesis. For example, did the CEO change and the new leader made a major change to how the company operates? Or, did something huge happen in the market that causes you to change how you see the company’s prospects.
Long-term investors understand that many companies — Amazon being the most famous example — don’t manage to deliver quarterly results, Instead, their leaders make the best decisions for the company to succeed over decades, not quarters. That’s why Amazon (to stick with the example) has been willing to have money-losing quarters where it invests in the infrastructure it needs for long-term success.
