Many investors worry about stock price pullbacks. Don't be like the masses. Invest in good solid companies which have (1) competitive advantages, (2) are profitable, and (3) which generate strong Free Cash Flow (FCF). If you do this then you will have a greater appreciation for lower stock prices.

 

Worldwide equity markets are certainly experiencing some interesting times. Interesting as in…. ‘wonderful’. Yet, when I see images of investors looking at stock screens during market pullbacks, I don’t think ‘wonderful’ is the term that comes to their mind.

I have mentioned in previous articles (see here and here) that investors should embrace lower stock prices. This, however, is much easier to do when you invest solely in high quality profitable companies which generate strong Free Cash Flow (FCF) and which have competitive advantages.

Investing in speculative companies can certainly pay off but then…you’re taking on more risk. There is absolutely nothing wrong with taking on a higher level of risk if this suits your investor profile and you are prepared to potentially incur a permanent impairment to your capital. I strongly suspect, however, that many investors truly underestimate their level of risk tolerance until such time as things really turn ugly.

After having followed the teachings of Buffett and Munger for several years I formulated my 10 Investment Commandments for Early Financial Freedom While I reference General Electric (GE) in point #7 of that article, I bailed on GE in 2017 when I completely lost confidence in this company. In addition, the ‘Technology’ companies (point #6) in which we currently hold shares are restricted to Microsoft (MSFT) and Cisco (CSCO).

I fully imagine Buffett and Munger are currently in the process of deploying some of Berkshire Hathaway’s (BRK-a and BRK-b) ‘treasure chest’ to acquire shares in high quality companies which have pulled back to more reasonable valuations (eg. Mastercard (MA), Visa (V), Moody’s (MCO), Bank of New York Mellon Corp (BK)); I have been increasing my position in those companies. Meanwhile, countless investors are unloading their shares in the very same high quality companies!

I have never met anybody who can consistently accurately predict where a company’s stock price will end up in the short-term. As a result, I recommend you invest in high quality companies when you think they are fairly valued and invest with the intent of holding the acquired shares for the very long-term.

I am most certainly not telling you how to invest your hard earned money. If, however, you want to make money over the long-term and you want to sleep well without worrying about your investments…. stick with high quality companies with a track record of dividend increases and put yourself in a position where you get excited when stock prices plunge.

I wish you much success on your journey to financial freedom.

Thanks for reading!

Note: I sincerely appreciate the time you took to read this article. Please send any feedback, corrections, or questions to [email protected].

Disclaimer: I have no knowledge of your individual circumstances and am not providing individualized advice or recommendations. I encourage you not to make any investment decision without conducting your own research and due diligence. You should also consult your financial advisor about your specific situation.

I wrote this article myself and it expresses my own opinions. I am not receiving compensation for it and have no business relationship with any company whose stock is mentioned in this article.