The recent stock market crash has led to many UK shares trading at lower prices than they have done for a number of years.
Some investors may view this as the wrong time to buy such stocks, due to the prospects of a second downturn. But I think now could prove to be an opportune moment to capitalise on low valuations among high-quality businesses.
This strategy has been used by successful investors such as Warren Buffett over the years. Use it over the long run and you could improve your financial position and increase your chances of retiring early.
Buy at low prices after the market crash
Buying UK shares after a market crash is a means of capitalising on widespread investor fear. Yes, some shares have fully recovered from their recent declines. But investor sentiment towards a large number of companies continues to be weak. This is due in part to their challenging near-term financial outlooks. The end result is that they offer wide margins of safety that could translate into attractive returns over the long run.
Warren Buffett has often sought to take advantage of weak investor sentiment. Although this does not necessarily mean that he will enjoy strong returns in the short run, over the long run it has proved to be a profitable strategy. Inevitably, investor sentiment has always improved following its low ebb in the aftermath of a market crash. Over time, this has led to rising share prices. Although such a prospect may be difficult to imagine for many stocks right now, in the long run, the track record of the stock market suggests it is likely.
Buy businesses with competitive advantages
Of course, buying UK shares after a market crash may mean that investors end up holding unattractive businesses. After all, some stocks are likely to deserve their low current valuations.
As such, it could be a good idea to follow Warren Buffett’s lead and purchase those companies that have a competitive advantage over their sector peers. For example, they may have a superior product, a more efficient business model or stronger brand loyalty than their peers. This may allow them to generate higher profitability over the long run that means they can command a higher valuation.
Unearthing the best businesses
Finding high-quality UK shares at cheap prices after the recent market crash may be simpler than many investors realise. For example, many sectors are currently viewed unfavourably by investors. Not all businesses within them will fold, nor do they all have weak balance sheets or poor growth strategies.
Therefore, buying high-quality companies in unpopular sectors could be a sound strategy that leads to high returns. It may not put your net worth on a par with that of Warren Buffett, but it could improve your prospects of retiring early.