Two years ago, global stock markets experienced a significant sell-off as the pandemic caused mayhem. For some investors it was a time of stress and panic, but for many professional investors it provided a rare opportunity to pick up shares in good companies for a fraction of their value pre-Covid.

Fund managers continued to talk about this fortuitous moment well into 2021, saying it paid to look beyond the doom and gloom at the time and take a long-term view on a company.

With markets having once again pulled back, albeit nowhere near to the extent of 2020’s sell-off, have investors filled their boots and loaded up with top quality names at discounted prices?

Stocks in general haven’t bounced back yet and the mood of the market doesn’t feel as if a lot of fund managers have raced to ‘buy the dips’ and take advantage of lower share prices.

Many investors who bought after the market decline in February/March 2020 took the view that some companies would either benefit from structural market changes accelerated by the pandemic or that others had been sold off too much and should quickly recover from Covid disruption.

This year, the sell-off has been driven by fears that we’re at a significant turning point for markets, with central banks raising rates and reducing market liquidity.

Tightening monetary policy suggests it will be harder to make the kind of returns we’ve seen in the past decade from markets – it’s a repricing of risk. Therefore, it is natural for investors to be more cautious and not simply flock to what’s done well in the past.

The shift in market sentiment will have forced a lot of investors to rethink their portfolio. 

Nick Train-run asset manager Lindsell Train has just sold approximately half of its stake in education group Pearson (PSON) on a day when the share price jumped on a rare bit of good news. The asset manager has yet to comment on the disposal, but this looks like giving up on a long-term underperforming stock – something I expect many investors to do as they look to shore up their defences and have a more robust portfolio.

Pershing Square’s (PSH) manager Bill Ackman picked up a large holding in Netflix after its share price collapse. Otherwise, the silence among investment professionals is notable with regards to new positions following the market sell-off. Of the three managers I interviewed in late January, none of them had bought new positions for their portfolio in recent weeks.

I wouldn’t be surprised to see investors think more about bear market conditions and flock to companies that have financial strength and resilience. If you’ve got spare cash and are confident enough to buy when markets remain volatile, it may pay to focus on quality stocks rather than ones that promise a big breakthrough in the future (so-called ‘story stocks’).

They may offer lower growth, but these compounders are typically where the best money is made over the long-term. Look for high cash flow generation, low capital intensity and minimal dependency on debt to grow. This article will help get you started.

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