Buying undervalued stocks in the markets can be a very good long-term investment strategy for many investors. However, the process can be very difficult sometimes and near impossible for the average investor. Meaning an investor that does not invest on a daily or weekly basis but who may own a 401k, IRA, Roth at their jobs, or another account at a brokerage firm that they use to periodically invest in other investments are the most disadvantaged.
The reasons that it may be difficult to find under-valued stocks, especially in today’s markets, is because of the continuing conflicting messages that investors are seeing, hearing and experiencing daily that affect asset values. We hear on a daily basis that the economy is doing extremely well, it’s one of the strongest in a decade, and we are at full employment. But last month, actual Gross Domestic Product (GDP) numbers came in at 2.1% last quarter. This number does not suggest that the economy is growing faster or stronger than usual. It likely suggests that the economy is growing at a normal or average pace. If the economy is strong, why did the Feds need to lower interest rates. Remember, the Fed lowers fed funds rates to stimulate the economy by making it cheaper for companies to borrow money which in turn affect asset values. Rates on credit cards and home equity lines of credit track the fed funds rate closely and provide more spending power for Americans. On the July 31, 2019, the Fed cut interest rates by .25 basis points. So what is it? Is the economy strong and growing or is the economy about to crash or slow down?
Finally, although some markets and industries, as tracked by very popular indexes, are doing very well. There are thousands of companies that are not. Because of how investment risks has been spread-out and diversified in most mutual funds and exchange-traded funds, the fear of losing all of your investment is not as acute to investors as it has been in the past. Meaning, there are so many poor performing investments mixed in with a few well performing stocks that many investors have no idea whether the investment that they own is undervalued, overvalued or fairly valued especially if you own shares in mutual or exchange-traded funds.
Its very challenging to find undervalued or fairly valued investments in the markets. Investors still have to do their research homework to make sure that they have an investment that will perform based on what the marketers and distributors of the investment say that it will do. Although, finding great value is a very complicated and difficult tasks, if done right can have very rewarding results for the long-term investor.