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As a growth investor, I have found the ongoing downturn in the stock market to be quite disheartening. My portfolio has experienced a substantial decline and it still has a significant way to go to fully recover.
Nonetheless, investing in stocks during such turbulent times comes with a price. It serves as a strong reminder that prices are not always on the rise.
Despite the frustration of the past 18 months, I am not losing sleep. My focus remains on the long term. I firmly believe that the companies in my portfolio are robust enterprises with tremendous potential for growth.
That’s why I consistently allocate funds every month to purchase shares, even at the current low prices. And, thus far, it has proven to be a lucrative decision.
Earnings for the third quarter of 2023 are still pending. Many of my companies, however, have surpassed analysts’ gloomy projections, resulting in significant double-digit gains in share prices.
Despite this, numerous top stocks still seem undervalued. As demonstrated by billionaire investor Warren Buffett, investing in high-quality businesses below their fair value can lead to substantial wealth in the long run.
Concentrate on high quality at affordable prices
While stock market volatility is not new, corrections of this scale are exceedingly rare. In fact, investors have not witnessed such a significant decline in valuations since the financial crisis, which was 15 years ago.
Although I am confident that this instability will reappear, it could potentially take another decade. Therefore, now might be the opportune moment to begin acquiring undervalued stocks.
Nevertheless, not every undervalued growth stock is a bargain. Reforms are fueled by fear, and at times the concern is justified. The macroeconomic landscape has undergone significant changes. Debt is no longer nearly costless, and companies that have relied on external financing are feeling the strain of higher interest rates.
That’s why I place a significant emphasis on generating free cash flow when investing in a business. This represents the money a company has remaining after covering its operating and capital expenditures. It is this cash that organically accumulates on the balance sheet.
This liquidity offers flexibility, enabling a business to become or remain financially independent. Hence, the businesses in my portfolio with higher debt burdens appear to be at risk, even with interest rates rising from 0.25% to 5.25%.
Meanwhile, some unprofitable companies are also not immune. Yet, investors are offloading them regardless of the fear of loss. This is how long-term purchasing opportunities materialize.
Investing amidst volatility
Every stock market decline and correction in history has ultimately given birth to a new bull market. Exceptional returns have been achieved during the recovery. Unfortunately, it is nearly impossible to predict when this upturn will commence.
This is why injecting capital into the market during tumultuous periods is my preferred strategy. If the top-tier stocks continue to decline, I will have more capital to acquire even more shares at a better price.
Naturally, it is crucial to monitor the performance of companies closely. Surprises can emerge overnight, and a once thriving company can turn into a value trap.
Yet, through disciplined and well-informed decisions, investors can leverage the correction as an opportunity to elevate their portfolios to new heights.
The post Could this stock market plunge be a unique chance to become wealthy? appeared first on The Motley Fool UK.
The opinions expressed regarding the companies discussed in this article are solely those of the author and may differ from the official recommendations we provide in our subscription services like Share Advisor, Hidden Winners, and Pro. At The Motley Fool, we believe that considering a diverse array of insights can make us better investors.
Motley Fool UK 2023