This week, US broadcaster and one-time fund manager Jim Cramer said he thinks stock markets now look oversold, and there are signs of capitulation in several areas.
That’s a good thing, because if previous bullish investors are giving up and selling in their droves, share prices could spike down artificially low on the volume of ‘sell’ trading, providing a good-value entry point for new investors who are buying.
It’s time to buy
Now is the time to start buying shares, Jim Cramer reckons. He acknowledges there is always risk that the market could go lower, but to counter that risk he suggests that we should stick to high-yielding dividend shares that have fallen, or companies punished, even though they reported solid numbers or positive news.
I agree with him. Market retreats often provide opportunities to pick up the shares of quality firms at a better price. The key to minimising risk is to avoid ‘story’ stocks with little or no earnings and other stuff that positive sentiment might have launched into the stratosphere — lower-quality firms such as those could have much further to fall.
Why listen to Jim Cramer?
Don’t let Jim Cramer’s madcap broadcasting style put you off his message. He is an experienced and successful investor with a knack for getting the big calls right.
I first noticed the zany market commentator back in 2007 when he was urging the US government to take the gathering financial crisis seriously. He was among the earliest to identify the depth, breadth and severity of what was coming back then. So I think he’s worth listening to today.
In his Mad Money broadcast, he said: “I am not saying that a bottom has arrived … but I am saying that for the first time since this hideous decline began, we are beginning to see some of the necessary ingredients that make a bottom possible.”
Although there is little that Cramer likes about this market, one of his cardinal rules is that discipline always trumps conviction. That chimes with the investing ethos here at The Motley Fool. It can pay off to keep a cool focus on the underlying performance of the businesses represented by shares. When the market wobbles, we can combine our knowledge of a firm’s business with a good grasp of the financial numbers, to encourage buying when shares are cheap.
I reckon using stock market volatility to my advantage can pay off if I keep a five-year-plus investing horizon in mind.
What now?
It can feel counter-intuitive to buy shares when the stock market is falling. However, the stock market indices are not necessarily the same as the share prices of the firms that interest us.
I’m likely to look for bottoming, or an up-turn in individual share prices, and to combine that with good valuation numbers and decent forward prospects, before dripping more money into shares.