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Lately, there has been a lot of movement in the stock market. For some investors that could be a reason to sell, while others may see it as an opportunity to hunt for shares to buy. Is a turbulent market potentially a rewarding moment for an investor to buy shares?
What happens when the market shakes?
The reality is that it can be both a good or a bad moment, depending on a number of factors.
One factor is exactly what an investor is buying. When the market melts down, some shares may be very cheap – but others can still be highly overpriced even if that is not obvious at the time.
Another important consideration is an investor’s timeframe. Some investors may look for a cheap turnaround situation, hoping to buy a share in a turbulent market and sell it for a tidy profit soon afterwards.
That can sometimes be a lucrative approach (though it may come closer to trading than investing) — but potentially at the cost of missing even better, long-term opportunities.
Instead of using a market downturn to hunt for shares to buy hoping for a quick profit, I think the smart investor will often use it to try and buy into brilliant companies with an eye to holding them for years, or even decades.
As Warren Buffett’s erstwhile partner Charlie Munger said: ”The big money is not in the buying and the selling but in the waiting”.
Taking the long-term view
So when looking for shares to buy, I typically always come back to the same question. Over the long term, do I expect my investment to be worth significantly more than I need to pay for it now?
One of Buffett’s own long-term investments is instructive here: Coca-Cola (NYSE: KO). Buffett clearly likes the share he has owned for decades. But, at the same time, he has not added to his position for decades.
That could be because Buffett wants to keep his portfolio diversified. But it could also be because he has found other shares to buy during the past several decades that he felt offered him better value.
Something not all investors understand is that there is a difference between a great business and a great investment.
I like Coca-Cola’s business just like Buffett does. It has strong brands, outstanding distribution networks and a proven business model.
But it also faces risks, such as rising health consciousness eating into demand for fizzy drinks. And while its brands give Coca-Cola pricing power, there is only so much a company can charge for a can of pop before it starts to lose customers to rivals.
So paying too much for Coca-Cola could be a bad investment. Currently, the share is close to an all-time high and trades on a price-to-earnings ratio of 30. That is too high for me so I have no plans to invest.
But while Buffett has been selling shares in companies like Apple over the past year, he has hung on to all of his stake in Coca-Cola. He now earns well over half what he paid for it every year in dividends.
I am also trying to turn this turbulent market into a rewarding one by buying quality shares with staying power – but only at what I see as attractive prices.
