A falling stock market can be a great opportunity for investors. As prices come down, there can be chances to buy shares at some very attractive prices.
I’m on the lookout for stocks to buy in a volatile market. But there’s one potential pitfall I’m extremely keen to avoid, if at all possible.
Anchoring
Essentially, anchoring is the process of getting fixated on a specific stock at a specific price without paying attention to the underlying business. It’s easy to do and hard to avoid.
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Anchoring is usually associated with stocks going up. For example, the fact Rolls-Royce shares were trading at £5.88 at the start of the year makes it hard to consider buying them at £8.
But this is a mistake. Whether or not the Rolls-Royce share price is a bargain today comes down to the underlying business, not where the stock was three months ago.
Avoiding anchoring is hard, but that doesn’t make it right. And it’s just as easy (but no better) to get fixated on a high price in a falling market as it is with a low one when stocks are rising.
An example
One stock I own in my portfolio is DCC (LSE:DCC). Shares in the FTSE 100 conglomerate are down around 5% from where they were when I started buying them a few months ago.
My view of the business however, hasn’t changed. I still see it as a firm with the potential to generate a big return for shareholders by divesting its healthcare and technology divisions.
Streamlining the company to focus on its energy unit reduces the diversified nature of its operations. And I still see this as just as much of a risk with the stock as ever.
Nonetheless, my view of the stock at today’s prices is still more positive than it was when I first started buying. Despite this, it’s not top of my list of shares to buy at the moment.
Opportunities
I’ve been using the falling stock market to start buying shares in WH Smith (LSE:SMWH). The stock’s fallen almost 8% this year, but it’s the underlying business that’s caught my attention.
The firm has announced plans to sell its high-street stores and focus on its travel business. I see this as a very good move that the current share price doesn’t properly account for.
Shops in airports, train stations, and hospitals have some advantages over high street retail. There’s limited competition and customers can’t go online to find things at lower prices.
In a recession, travel demand could fall, hitting earnings. But while this is a serious risk, I think WH Smith’s travel division is worth the share price even without the high street stores.
Foolish takeaway
A falling stock market can be a great chance to add to existing investments at lower prices. But getting fixated on shares previously bought at higher prices can be a big mistake.
In my case, that means looking past DCC, which I bought at a higher price. Instead of just bringing my average down without thinking, I’m on the lookout for new opportunities.
Until recently, I didn’t own shares in WH Smith. But a combination of the stock falling and a change of strategy has forced it to the top of my buying list.
