Written by Daniel Da Costa at The Motley Fool Canada
If you’re wondering whether you should buy Canadian stocks when markets are falling, you’re certainly not alone. We all know to buy low and sell high, but in the moment, it can be far more complicated.
After all, seeing stocks get cheaper every day isn’t particularly reassuring if you think they could fall further. And when your own savings are involved, it’s understandable to want to wait until you feel more confident.
However, if you’re investing money you can leave in the market for years, you don’t need to worry about prices next week or even next month. In fact, those declines can create some of the best opportunities to buy high-quality businesses at attractive prices.
While investors can change what they’re willing to pay for a stock almost overnight, the business itself may still have years of growth ahead of it.
So, if you’re looking to put money to work on the TSX, here’s how to think about falling markets and which Canadian stocks could be worth considering.
When falling markets create buying opportunities
When you buy a stock, you’re buying part of a business. So, a lower share price can allow you to own more of that business for the same investment.
However, what many investors confuse is the price of a stock with the quality and long-term value of the business. When markets are booming, stocks can become overvalued. And when fear takes over, those same companies can become undervalued.
While share prices change every day, a company’s ability to generate cash over the long haul usually doesn’t change nearly as quickly.
Now, a major court ruling or policy change can certainly change a company’s outlook. But that’s different from a high-quality stock falling 30% alongside the rest of the market during a selloff simply because investors are becoming more fearful.
That’s why it can be especially helpful to own businesses you understand. If you can see why customers will still need their products or services 5 or 10 years from now, it becomes easier to look beyond today’s share price.
Furthermore, a long operating history helps you judge how the business performs through difficult conditions and how its current valuation compares with the past.
Of course, a stock that was overvalued before a decline won’t necessarily be cheap afterward. The opportunity comes when its price makes sense for its earnings and long-term growth potential.
Plus, investing a manageable amount regularly can help you keep accumulating shares while reducing the pressure to choose the perfect day to buy.
