History shows that investing in dirt-cheap ASX shares and holding onto them for the long term can be a successful strategy.
This approach allows investors to capitalise on market cycles by purchasing undervalued stocks during uncertain periods and retaining them as they recover over time. Though, it is important to note, that this strategy is not foolproof. Not all cheap shares recover from their current challenges, so investors need to be picky when it comes to choosing the ASX shares they want to buy.
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Identifying high-quality cheap ASX shares
As I mentioned above, it is worth remembering that not all cheap-looking shares are actually cheap. Some beaten-down ASX shares may be appropriately priced (or still be overvalued) due to factors such as outdated strategies or weak financial positions. Investors ought to stay clear of them and focus on companies that have been sold down due to temporary factors that will improve over time. These are where the big future returns could potentially be found.
Take for example Treasury Wine Estates Ltd (ASX: TWE), which has been having a tough time operationally. Its shares have come under pressure because of this, but nothing has changed in relation to its long-term outlook, which remains very positive. The same could be said for sleep treatment specialist ResMed Inc (ASX: RMD), which has been sold off this month.
Don't think about next month or even next year. Think long into the future. A Warren Buffett quote springs to mind here.
I buy on the assumption that they could close the market the next day and not reopen it for five years.
Foolish takeaway
Not all dirt-cheap ASX shares will recover from their low price levels. Therefore, it is important to be selective about the companies you add to your portfolio.
But by focusing on great value shares that have robust business models and positive long-term outlooks, I believe you could generate strong returns for your portfolio.
