Despite the fear, history has proven time and time again that a lot of money is made during and after crises. If you understand this, your portfolio will bear amazing fruits.
The uncertainty surrounding the increased inflation levels and the increase in the interest rate continues to weigh on the markets. The leading indices in the US are about 20% below their last peak.
I reckon it will be worse before it’s good, but it’s a reasonable time, in my opinion, to start putting our cash into work gradually. The stakeholders think so too. Stakeholders began to buy shares of their companies at an increased rate.
One of the best barometers to know when stocks are trading at a large short price for their fair price is the ratio of the volume of purchases to the sales of the interested parties. The interested parties are the senior managers of the company (CEO, VPs, etc.) and the investors who hold over 5% of the company’s shares. These people know the company they invest in or manage best, so they also know how much its activity is worth.
Peter Lynch, the greatest institutional investment manager of all time, said that “stakeholders can sell a stock for a lot of reasons, but they’ll only buy it for one reason — they think they’ll make money from it.”
Therefore, when interested parties buy shares on a large scale, they estimate their company’s shares are under-traded.
In the past month, the ratio of stakeholder shopping to sales has risen to a new high, and as of May 2022, this ratio stands at 1.08. A high ratio compared to the past, which crossed the one threshold only a few times, as during the covid-19 period and the 2008 crisis. The ratio is lower than during the crises, but if the market continues to decline, the assumption is that the volume of purchases by stakeholders will increase.
Although this is an excellent indication that stocks on the market are beginning to trade at attractive prices, historically, stakeholders tend to buy their shares before the bottom. This is not surprising – no one knows how to time the market, so you have to buy stocks when they are cheap enough regardless of other elements. Stocks may decline after buying due to investors’ short-term irrationality, but down the road, stocks will return to their fair price.
As you know, it is impossible to time the bottom. Therefore, the effective way to substantiate the point of entry into the market is to purchase the shares that interest us in several parts. For example, divide the money into four equal portions and purchase one part per period, depending on market behavior. The faster the declines deepen, the faster it will be possible to purchase additional parts. This is how you buy shares of quality companies at cheap prices and substrate the entry point to them without the need to time the market.
In recent days, we have indeed begun to take advantage of the irrational declines in the markets in order to start buying into the portfolio of shares of quality companies, which will get through the crisis without difficulty and are traded at fairly cheap pricing. Such shares are a once-in-a-lifetime investment opportunity that can only be bought during the crisis.