Buying dirt-cheap stocks after the market crash could be a sound means of generating high returns in the long run. Undervalued shares have historically offered strong capital gains as the stock market recovers from its lows.
Other assets such as Bitcoin and gold have risen sharply in price over recent months. But the risk/reward opportunity from stocks could be more appealing. Over time, the stock market could help you to improve your financial situation.
Buying dirt-cheap stocks and holding them for the long term is a relatively simple investment strategy. However, it could prove to be highly effective in generating impressive returns.
The stock market has a long history of experiencing ups and downs that provide an opportunity for investors to buy stocks when they are undervalued, and sell them when they are overvalued. Clearly, executing that strategy is likely to be more difficult than it sounds in theory, since low points in the stock market’s performance generally coincide with higher risks.
As such, buying dirt-cheap stocks will not necessarily produce positive returns in the short run. It may even mean paper losses if the economy’s outlook deteriorates further. However, at the present time, valuations on offer across the stock market suggest that investors are pricing-in difficult operating conditions for many businesses. This could mean that the margins of safety on offer are sufficiently wide to merit investment. Over the long run, this may translate into high profits for investors.
Of course, buying dirt-cheap stocks does not mean that investors should overlook their attributes. In other words, it is far better to buy stocks that are not necessarily the cheapest around, but rather those that offer the best value for money.
For example, paying more for a stronger business within an industry could a worthwhile move. It may be better placed to overcome the short-term issues that are currently affecting the economy. It could also become more dominant in the long run, and generate higher profits, if it can outlast weaker peers. This may translate into higher returns for investors – even though they may have initially paid a higher price compared to other stocks in the same sector.
A long-term hold
While dirt-cheap stocks may be outperformed by other assets such as gold and Bitcoin in the short run, over the long run, they could produce more attractive returns. The track record of the stock market shows that a sustained bull market is likely following a market crash.
Therefore, by purchasing stocks while they are good value for money in many cases, you can potentially enjoy improving investor sentiment and rising profitability for many listed companies. Over time, this may lead to strong capital gains that improve your financial position.
Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.