With inflation still putting pressure on stock markets worldwide, finding the best shares to buy is proving tricky. It seems even the best businesses are being hammered into the ground today, making life tough for equity investors.
But as frustrating and painful as things are today, there could be countless lucrative long-term buying opportunities for my portfolio. Let’s not forget the stock market has a 100% track record of recovering from even the most horrendous economic catastrophes. And I’m fairly confident that’s not about to change.
With that in mind, how can I find the best investment opportunities for my portfolio today, next year, and beyond?
The impact of inflation
Inflation itself isn’t what’s causing stock prices to plummet. Instead, it’s the side effects of inflation that’s got everyone in a huff.
To combat rising prices, central banks have begun raising interest rates. And while there are other factors at play, this appears to be the primary culprit behind the volatility currently plaguing the markets.
Increased rates with further hikes likely on the horizon are making debt increasingly expensive for consumers and businesses alike. It’s particularly problematic for companies that have become reliant on debt financing, especially during the pandemic. After all, higher interest rates mean a higher cost of servicing debt, resulting in tighter profit margins.
The situation is obviously bad for many over-leveraged businesses. But, fortunately, there are plenty of companies that remain financially sound. And even those with loan liabilities to contend with may be unaffected by the macroeconomic environment if the interest rates on their debts have been fixed.
Despite this, many have been caught in the panic-selling crossfire. Yet, in my experience, this is how long-term buying opportunities are formed. And that’s where I believe I can find some of the best shares to buy.
How to find the winners
Having a strong balance sheet is obviously a good start. But what’s even better is finding companies that also have sufficient resources to outpace their struggling competitors.
The current investing environment highlights the importance of maintaining a vast collection of competitive advantages. While sales volumes may suffer in the short term as consumer spending slows, creating barriers to prevent rivals from stealing market share is critical for long-term success. Moreover, these advantages can even be used to capitalise on weakened opponents to steal their customers away.
Finding businesses capable of leveraging a competitive moat is obviously easier said than done. Not to mention that a random external force could de-rail the entire process.
Needless to say, finding the best shares to buy is a difficult endeavour fraught with risk. That’s even more true today, with stock prices seemingly in free-fall. But by focusing on the groups in good financial health with a wide competitive moat, I can certainly narrow down the search.