Time to buy dirt cheap shares to capitalise on the market recovery?

UK money in a Jar on a background

High-quality, dirt cheap shares are set to be the biggest beneficiaries of this stock market recovery. Their discounted valuations provide investors with a far wider margin of safety and significantly more growth potential when the financial market starts rising again.

Snapping up these businesses while they’re still being underappreciated has long been a proven investment strategy for building wealth. It’s a tactic that investors like Warren Buffett have and continue to use. And since many UK shares have yet to recover from the recent turmoil, is now the time to start buying? Let’s investigate.

When will the stock market recover?

Buying the best shares before a recovery takes place is far easier said than done. Looking back, it’s easy to say, “I should have bought then”. But at the time, it’s exceptionally difficult to find such confidence, even for expert stock pickers.

Timing the market is virtually impossible. And all too often, the few that manage to pull it off mistake skill for blind luck. The truth is, no-one really knows when the recovery will take place. Despite this, thousands of individuals and even professionals continue to make predictions confidently even today.

Personally, I’m cautiously optimistic that 2024 will be the year of recovery. However, when this process will begin is anyone’s best guess. Perhaps it already started last October? The upward momentum seen over the last couple of months would certainly suggest it. Or maybe there’s more turbulence just over the horizon.

The good news is that even with this uncertainty, investors can still capitalise on the recovery without needing to know the exact timing of it. This is where pound-cost averaging enters the picture. By drip-feeding capital into terrific companies over time, investors have the chance to snap up quality cheap shares while still having money on the side to buy more should prices tumble further.

Even quality carries risk

There are many different reasons why a company can see its share price tumble. Sometimes, downward momentum is justified, especially if a business reports thesis-breaking news. But occasionally, a short-term hurdle can cause investors to lose their patience, triggering an over-reaction that other, more prudent individuals can benefit from.

Needless to say, it’s the latter that I’m on the hunt for this year. However, even these businesses don’t guarantee spectacular returns. Just because a firm is top-notch today doesn’t mean it will stay that way forever. A new threat may emerge in the future that causes growth to slow or takes away market share, leading to underwhelming performance.

Without a crystal ball, these risk factors can’t realistically be avoided. But that doesn’t mean they can’t be mitigated. By having something as simple as a diversified portfolio, a lot of risk can be removed from the equation. Therefore, investors should strive to own a diverse range of enterprises spanning different industries. That way, if one should fail, others can offset the damage to the overall portfolio.

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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.