"We simply attempt to be fearful when others are greedy and greedy when others are fearful," famed investor Warren Buffett has said.
With the S&P 500 and Nasdaq Composite down 12.5% and 18.2% year-to-date, respectively, there's certainly fear in the air on Wall Street. Both major indices are well into correction territory and the Nasdaq Composite is approaching a bear market (when a market index is down by 20% or more). Even more, many growth stocks are down around 50% to 80% from their 52-week highs.
So is this a good time for investors to exercise some boldness and buy stocks?
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Market valuation
While the high likelihood of upcoming interest rate hikes by the Federal Reserve and geopolitical headwinds resulting from Russia and Ukraine tensions certainly increase the risks to owning equities, there's a good argument that the recent drawdown in stock prices has more than priced in this uncertain environment. Consider that the average stock in the S&P 500 now has a price-to-earnings ratio of 24, down nearly 47% from 45 twelve months ago. Even more, S&P 500 stocks collectively trade at just 19 times analysts' forecasts for their earnings levels twelve months from now.
But many growth stocks have seen their valuation multiples contract far more severely, with their stocks plummeting over the last year. Streaming-platform company Roku (ROKU 1.38%) and social network Meta Platforms (META 0.57%), for instance, endured share price declines of 68% and 28%, respectively, over the past twelve months. In the last six months alone, Meta Platforms' price-to-earnings ratio has fallen from 28 to 14 and Roku's has slid from over 200 to 66. Of course, both companies' strong earnings growth during these periods helped contribute to this change in valuation multiple, too.
With many stock valuations down significantly across the market, it's safe to say that if investors look closely enough there are probably some bargains out there.
Don't try to time the market
"But how do I know the market won't go any lower?" some investors might ponder.
There's no way to know. In fact, it's always possible that stocks fall significantly lower from here before they begin recovering. That said, history shows that trying to time the market is a fool's errand. Further, it stands to reason that stocks are more attractive at lower prices than higher prices; so investors should not be shrinking back in fear right now but should instead be making wise and strategic investments with a portion of their capital. Sure, any stocks purchased during a market correction like this could suffer further drawdowns before a recovery ensues but no one can predict the future; so the best thing an investor can do is use the information available to them to assess whether an asset appears attractive today relative to its long-term potential and act on their assessment if the asset appears to be trading at a compelling price.
Remember: "Mr. Market is there to serve you, not to guide you," Buffett has also said. Falling stocks are not a reason to sell but rather a reason to consider looking even more diligently for attractive investment opportunities. Indeed, volatility is an investor's friend -- especially when they have new capital to deploy. For those who want to mitigate risks and avoid volatility, consider a savings account.
So is now a good time to a good time to buy stocks? If you plan to hold shares in a diversified set of high-quality companies for 10 years or more, probably. After all, stocks are on sale compared to the prices they were trading at last year. But only do so if you're willing to endure some volatility. Ups and downs are an unavoidable part of the game of investing. Or as investment writer Morgan Housel has said, "Volatility is the price of admission. The prize inside are superior longterm returns. You have to pay the price to get the returns."
