It takes a certain strength of character to go against the investing crowd, especially in the midst of a stock market crash.
As James Montier wrote in his Seven Immutable Laws of Investing, “Humans are prone to herd because it is always warmer and safer in the middle of the herd. We feel the pain of social exclusion in the same parts of the brain where we feel real physical pain“.
It is this kind of herd mentality that saw some investors fail to capitalise on the 2020 stock market crash.
Buying the best FTSE 100 shares at historic low valuations in late February and early March would have made you a small fortune by now. But not many of us had the gumption to do it.
What the stock market crash teaches
The 2020 stock market crash was a time of great fear and uncertainty. Nobody knew what was going to happen with the new virus spreading across the globe. Our share portfolios seemed insignificant in the face of a global pandemic. Toilet roll was suddenly at a huge premium. Remember that? Such is the madness of the herd.
And pre-2020, most people under the age of 35 had never lived through the panic of a stock market crash. Thankfully, now, we have what you could call a ‘teachable moment’ to look back on. I don’t particularly like this phrase, but it is apt.
Most FTSE 100 shares dropped at least 30% but have regained at least some of their value in the months since.
I’m not saying buying quality FTSE 100 shares on weakness is easy. It’s certainly not. While I’ve done pretty well since the stock market crash, when the sky was falling all I could think about was running for the hills.
Best FTSE 100 shares offer value
As value investors we have one distinct advantage if faced with another stock market crash.
That is being able to look beyond short-term froth and focus on long-term strength. We can look outside today’s share price and zero in on FTSE 100 shares with growing profits, earnings per share, a strong economic moat and a competitive advantage.
Everyone has a different calculation for fair or intrinsic value. Doing these kinds of simple sums is something of a lost art in today’s world.
You need only look at the froth and hype around ridiculous business models like Tesla. Elon Musk’s baby can hit $1,500 a share and become the world’s most valuable car company despite never having posted a full year of profits. A $1bn loss in 2018 was followed by an $862bn loss in 2019.
But you can get started with value-seeking by looking at free cash flows, price-to-earnings growth ratios and things of that nature. All of these metrics are freely available for the best FTSE 100 shares with a quick Google search.
It’s very hard to have thought long and hard about a particular investment and to see it do nothing for months at a time. But when the market catches up with you, it is an incredible feeling.
As Montier writes: “Valuation is the closest thing we have to a law of gravity in finance“. And nothing, not even hype, can resist gravity in the end.