Quality UK shares have a long track record of helping investors build considerable wealth over the long term. While not every publicly traded company goes on to success, the few that do can easily make up the difference. And when looking at the stock market right now, plenty of seemingly top-notch enterprises appear to be trading at mouth-watering discounts.
This pessimistic view from investors may be justified. After all, the aggressive hikes in interest rates have created a far more challenging operating environment, especially for companies in need of financing. However, not every business falls into that category. And that includes some unprofitable enterprises that have hoarded cash over the years.
Capitalising on a negative outlook
With most people still concerned about the short-term challenges around the corner, little attention is being paid to the long-term picture. This is how absurd-looking discounts are able to form since most investors are making decisions driven by the motivation of minimising losses rather than maximising gains.
However, history has shown this mentality to be a major error. There’s no denying that short-term volatility is an unpleasant experience. Yet, providing a portfolio is filled with high-quality companies that have the talent and resources to succeed, investors can end up reaping ginormous returns in the long run when buying in at a discount.
In fact, such gains have already started to materialise for prudent investors exploring the FTSE 250. The UK’s flagship growth index is already up by 13% since the end of October 2023. And that’s not including the extra returns from dividends. For reference, the index has historically only averaged 11% annualised gains.
Everything carries risk
Many of the hurdles companies are facing today are short-term threats. However, that doesn’t mean long-term investors can ignore these threats. Just because the Bank of England is planning to eventually cut interest rates doesn’t mean they don’t pose a threat today.
Hundreds of publicly traded businesses have had to execute radical structural changes to bring down their leverage to a more manageable level. And even firms from within the FTSE 100 are included in that list, with the most notorious arguably being Rolls-Royce.
But interest rates aren’t the only threat to consider. The tragic conflict in Gaza has resulted in a massive reduction of trade moving through the all-critical Suez Canal. As such, a new round of supply chain disruptions could be just around the corner for ill-prepared firms.
There are a lot of different ways cash flow can be interrupted. It’s a risk factor that could have dire consequences, especially for firms with crumbling balance sheets. And it’s up to investors to carefully investigate the threats a business has to contend with before buying any cheap-looking bargains.
The post Is buying cheap UK shares right now the key to financial freedom? appeared first on The Motley Fool UK.
Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has recommended Rolls-Royce Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2024