Instead, seek opportunities where a great business is facing non-company-specific risk or is overlooked due to unfavourable macroeconomic trends.
These moments create rare opportunities to acquire stakes in outstanding companies at compelling valuations. During the COVID crisis, an exceptional investment window opened to buy into Europe’s leading ticketing and live events company – an opportunity driven purely by extreme macroeconomic pessimism.
Yet, despite the broader market turbulence, the company’s financial strength and competitive edge remained unshaken, making it a truly once-in-a-generation opportunity. The company has tripled its share price since then.
You don’t need to chase once-in-a-generation bargains like this, but as long as you enter at a reasonable valuation, you’ll stack the odds in your favour, limiting downside risk while letting great management teams work their magic over time.
Capitalising on shifts in sentiment
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Market sentiment fluctuates, even for companies with strong fundamentals. Over time, even the best businesses will experience cycles of heightened optimism and periods of doubt.
When sentiment turns excessively bullish, valuations can become stretched, making stocks more vulnerable to sharp corrections. Even with exceptional companies, investors should expect losses if multiples become overextended and market expectations rise to unsustainable levels.
To manage this risk, investors should look to trim profits when valuations soar beyond historical norms and reallocate capital into high-quality businesses facing temporary negative sentiment.
This continual process of trimming and reallocating ensures that investors capitalise on sentiment changes while staying anchored to fundamentally strong companies. Mastering this dynamic approach can lead to superior long-term returns while taking the heat out of any portfolio.
Successful investing is not only about finding the right companies – it’s about entering at the right price and continuously optimising your portfolio. By investing alongside exceptional management teams, purchasing shares at reasonable valuations and capitalising on shifts in sentiment, investors can build a strategy that compounds wealth over time.
The key is discipline. Rinse, repeat, and stay focused on long-term value creation.
Lawrence Lam is the author of The Founder Effect and managing director of Lumenary, with over two decades of expertise in global equities, risk management and advising boards on investment strategies.
- Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their personal circumstances before making any financial decisions.
