Don’t Be Fooled by Cheap Stocks: Invest in Quality
COL Financial
Expert
Key Points
While buying something cheap may make us feel like it's always a good deal, there's always the thought of how long that item will last. Based on COL Equity Strategist April Tan's recent column, this article discusses the importance of focusing on quality stocks and how it can help you grow your portfolio for the long-term.
When buying stocks, it’s easy for investors to be attracted to the cheap prices of stocks and overlook that they may be buying into value traps. While the cheaper option may seem like a bargain at first glance, it often comes with risks that may outweigh its perceived value.
For example, cheap prices may be low due to a poor growth outlook. This could be due to the company being part of a bad or underperforming industry—if the company has low-quality products and services.
One other reason is poor management, when a management team cannot be trusted to make honest and smart business decisions, investors will find it hard to believe in their capability to grow the business, which can result in a declining stock price.
Sometimes you can find undervalued companies with a strong cash flow or valuable assets, and there are also cheap companies that hold assets more than their current market value. However, turning that potential into actual gains can be tricky, and can leave investors stuck owning stocks that seem cheap but don't deliver the expected returns.
So, what should you actually be looking for?
Strong companies have favourable qualities that allow steady growth over a long period of time. Qualities of strong companies that contribute to growing or stable profitability include:
• Strong branding
• Loyal customer base
• A good management team
Because of this, even if you don’t get to buy strong companies at discounted prices—they may still be worth more investing into as they provide steady growth and earnings opportunities.
Therefore, the next time you are looking for stocks to buy, don’t be easily tempted by cheap prices. Focus on reasonably priced blue-chip or larger capitalized stocks with good financial performance, and/or quality stocks that provide cash dividends so you can lessen the risk of getting stuck with a losing position for a very long time.
Remember that quality is always better than price.
References:
1. Instagram post:
• URL: https://www.instagram.com/p/C4Xq23ruKBh/?igshid=MWN0N3dwZnhnemhsNw==
2. Business Inquirer article:
• Title: "Why it's far better to buy a wonderful company at a fair price than a fair company at a wonderful price"
• URL: https://business.inquirer.net/449450/why-its-far-better-to-buy-a-wonderful-company-at-a-fair-price-than-a-fair-company-at-a-wonderful-price
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