September 20, 2020

Why I’d buy dirt-cheap stocks instead of taking advantage of the surging gold price

The idea of buying dirt-cheap stocks may not appeal to some investors at present. The prospects for many companies are currently challenging in an uncertain economic world, which could lead to disappointing share price performances in the near term.

However, over the long run, their low prices could mean they produce higher returns than more popular assets such as gold. As such, now could be the right time to purchase undervalued stocks, rather than seeking to profit from gold after its recent price rise.

Current price levels

Since nearly all investors would rather buy assets when they trade at low levels, buying dirt-cheap stocks could be a sound long-term strategy. It may enable investors to purchase high-quality businesses while they offer wide margins of safety.

This could lead to impressive returns as the world economy recovers in the coming years, and the stock market gradually returns to previous highs.

By contrast, the recent rise in the gold price may mean new investors are purchasing the precious metal at an unfavourable price level. It recently hit a record high, which suggests investors have already factored in a period of low interest rates and economic uncertainty.

It could trade higher in the coming months if recent economic trends continue. But its capacity to produce sustainably high returns in the long run seem to be somewhat limited.

Past trends

Of course, some dirt-cheap stocks could be priced at low levels for good reason. For example, they may have weak balance sheets or find it difficult to adapt their business models to a changing world economy.

However, the past performance of the stock market suggests it’s very likely to recover. Therefore, buying a diverse range of companies now and holding them for the long run could lead to strong capital growth. After all, no recession or stock market downturn has ever lasted in perpetuity.

Equally, the past performance of the gold price shows it also experiences peaks and troughs. For example, it took the precious metal nine years to return to its previous high from 2011 after falling out-of-favour with investors during the equity bull market of the past decade.

Therefore, it’s very unlikely to continually make new record highs as the outlook for the world economy improves, and investors become more comfortable in taking greater risks with their capital.

Buying dirt-cheap stocks

Clearly, it’s imperative to buy a diverse range of dirt-cheap stocks. It’s too soon to know which sectors and regions will return to strong growth following the coronavirus pandemic. But by having exposure to a wide range of geographies and sectors, you’re more likely to benefit from a stock market recovery.

Over time, this can have a more positive impact on your financial position than buying gold while it trades close to a record high.

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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.

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