For many people, Black Friday marks the start of the holiday shopping season. Most retailers cut their prices, store traffic increases, and online shopping carts fill up with lightning speed. Although you won’t see people racing through stores to buy stocks, bear markets like the one we’re currently in can serve as a Black Friday for value investors.
Stocks generally have two values: the actual price the stock is trading at and the intrinsic value. Market value will tell you how much people are willing to pay for a stock, while intrinsic value is based on calculations using various financial models and metrics. As a value investor, the goal is to buy stocks whose market price is below their “real” value. It’s not always the easiest thing to do, but it’s usually much easier in bear markets when share prices are falling.
It’s been a rough 2022 so far
The stock market has always experienced volatility, but 2022 has been off to a particularly rough start. All three major indexes — the S&P 500, Nasdaq Composite, and Dow Jones — are down double-digit percentages, and many blue chip stocks are right there with them. Investors who’ve been around a while understand that bear markets are nothing new. Since 1929, the U.S. has been in a bear market almost a quarter of the time.
Watching your portfolio’s value drop is never fun, but you always want to keep your long-term goals and financial plans at the forefront. You don’t want short-term developments to drive you to do things like panic selling, which likely does you a disservice in the long run. If anything, bear markets can be a bargain-hunting opportunity like Black Friday — a time to invest in some of your favorite companies at a discount.
Use this time to lower your cost basis
If you saw a pair of shoes or television you’ve been eyeing for a while suddenly go for 20% off, you’d likely consider it a good time to make the purchase. The same can go for stocks. If a stock’s intrinsic value is $100 and it’s trading at $80, it’s a chance to increase your position and potentially lower your cost basis, which is the average price you’ve paid per share of a stock.
Your cost basis is important, because it determines how much you eventually profit or lose from selling a stock. The lower your cost basis, the higher the profit potential (or the lower your loss potential). If you bought 20 shares at $50 each and then 20 shares at $100 each, your cost basis would be $75. If that same stock dropped to $90 and you bought 20 more shares, your cost basis would be $80.
Focus on the long term
Volatility is as much a part of the stock market as stocks themselves. If you’re focused on the long term and believe in the potential of a company over such a time horizon (which you should if you’re investing in it), then short-term price movements shouldn’t have too much of an effect on you. It’s easy to make decisions based on emotions when it comes to money, but that’s usually the wrong approach to take.
Dollar-cost averaging — which involves making regular investments at set intervals, regardless of stock prices at the time — is often a good strategy to use, but it can be even more effective during bear markets, because it takes some of the emotions out of investing and helps investors avoid the urge of trying to time the market. Time in the market (the longer the better) and consistency are two of the biggest factors that determine how well your portfolio performs over time. Stay the course, and you’ll surely be glad you did.
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