One surefire way to lose money in the share market is to buy overvalued ASX shares that have poor business models and no competitive advantages.
Conversely, if you want to become rich in the share market, buying cheap ASX shares has delivered strong results for investors in the past.
Buying cheap ASX shares
It is very important to note that when you're buying cheap ASX shares, you need to be very selective.
Just buying everything that looks cheap can be a very bad strategy. After all, sometimes shares are cheap for a reason.
For example, a company could appear cheap on paper based on last year's earnings. But if this year's earnings aren't going to be anywhere near as strong, then it will soon become apparent that you were looking at a value trap.
And we certainly want to avoid those. Value traps not only destroy wealth but also hit you with opportunity costs. This is where you've missed out on other gains because you've invested elsewhere.
What we want to do when looking at cheap ASX shares is find those high-quality businesses that have been sold off because of a short-term issue.
CSL Limited (ASX: CSL) shares are a prime example of this. The biotechnology giant is arguably Australia's highest-quality business. But it fell out of favour with the market last year after revealing that its margins would take longer than expected to recover to pre-COVID levels.
As a result, investors sold its shares all the way down to $228.65 at one stage in October. Whereas today they are now fetching $291.86, which is almost 30% higher than its low.
And while CSL's shares may no longer be cheap, you can bet that there will be similar situations that occur in 2024. I plan to sit patiently and wait for those opportunities to arise.
