Buy quality on weakness

Debt Free

Happy To Be Debt Free

The best time to buy stocks is on a generalised market sell-off. We all know this, but it can be a difficult thing to do, psychologically, when everyone else is in panic mode.

It’s always unlikely, though, that you’ll hit the absolute low point, so it’s always best to try and buy quality on weakness.

In other words, try to follow Warren Buffet’s advice: “Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.”

And if you don’t buy good quality shares when they’re cheap in a generalised panic; when do you? By following such a strategy, you will come out ahead over time. How much cash you hold when the market rallies is a tough call, though, and depends on your personal circumstances – how much you earn, your age, how much cash you need to take out etc.

Deciding which companies are good quality is, of course, the other hard part. First off, try to look out for essential suppliers of goods and services with rock-solid balance sheets. Any company which keeps coming back to the market for more cash is metaphorically calling the debt helpline.

Look for solid book value, low or negative gearing and a sustained history of profitability – and have the courage to buy on the market’s big dips. Going against the market’s tide in this way is hard, but it’s necessary for successful long term value investing. It’s perfectly possible to buy defensive stalwarts on generalised market weakness as recent history has demonstrated. Ask yourself – can we really go on without big supermarket groups, food suppliers, or utilities, for example? When the valuations of even these companies are getting trashed collectively, it’s time to start picking out those with the strongest balance sheets and lowest P/Es.

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