Over the past few months many stocks have endured a bear market. But bear markets precede bull markets. And my belief is the recovery might have already started for some businesses. So I’ve been hunting for the best shares to buy now.
Share price drivers
Two things tend to drive the movement of share prices. The first is the performance of underlying businesses. Are earnings rising, falling or standing still? Shares often reflect that.
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The second driver of stock prices is investor sentiment. Optimistic investors can drive share prices higher in anticipation of improvements in a business. And pessimism can cause share prices to move lower if investors think lower earnings are on the way.
I think optimism is beginning to grow in the stock market. And my guess is some businesses will perform better than investors expected over the next few months. Therefore, I’ve been buying some shares over the past couple of weeks.
And the great thing about buying now is that many companies’ valuations have been pushed lower by the bear market. In some cases, the market will be right. And lower valuations now will be justified later by smaller earnings. But I reckon there will likely be a surprise from many businesses. And earnings may remain robust or even grow in the next few months.
Sifting for nuggets
I’ve been trying to sort out the good ones from the bad. And, of course, it isn’t an easy task. But I’m focusing on the quality of businesses and looking for enterprises with an unbroken runway of long-term growth. Finally, before buying a stock I’m insisting on an upbeat recent trading statement.
For example, I recently bought shares in software business Netcall and in video game developer Frontier Developments. I also picked up a few shares in law-focused finance and asset management company Burford Capital.
Another recent purchase was the stock of Cranware. It’s a UK company engaged in the development, licensing, and support of computer software for the healthcare industry in the US.
There is no guarantee that any of these shares or their underlying businesses will go on to perform well as I hope. But embracing risk is the only way to expose my portfolio to upside potential. And as with all stock market investing, it’s possible for me to lose money on my selections.
Mitigation by diversification
However, I’ve been aiming to mitigate some of the risks by diversifying across several investments. And another strategy is the use of investment trusts. The great thing about such trusts is they invest across multiple underlying businesses. And another benefit is each trust will employ an investment manager or a team of managers. So the stock picking tactics and strategy in my portfolio will not all be my own. And in that way, I’m diversifying away from myself as well!
My recent purchases include Scottish Mortgage Investment Trust, Fundsmith Emerging Equities Trust and Finsbury Growth and Income Trust.
Positive performance is not certain. But I’m hoping a long-term approach to investing in these shares will deliver a worthwhile outcome in the end.
