As sterling continues its precipitous fall, the doom and gloom surrounding our economy intensifies. Instead of wallowing in self-pity, investors are better off searching for tomorrow’s big stock market winners.
This is one of my favourite Warren Buffett investing quotes. It comes from his 1990 letter to Berkshire Hathaway (NYSE: BRK.A) shareholders:
"The most common cause of low prices is pessimism -- some times pervasive, some times specific to a company or industry. We want to do business in such an environment, not because we like pessimism but because we like the prices it produces. It's optimism that is the enemy of the rational buyer."
There is no doubting this is a time of pervasive pessimism. In recent times, it has also become specific to the UK banking sector, as many people assume large swathes of the once-mighty industry will join Northern Rock and Bradford & Bingley and be nationalised.
The more difficult question to answer right now is whether share prices are low. Many wrongly people assume two things…
1) A company with a share price of 5p is cheaper than a company with a share price of 50p.
2) A company is cheap just because its shares have fallen 70% or 80% or more.
The UK Has Nothing
The global economy is in trouble. The British economy is in bigger trouble. As quoted recently in the Wall Street Journal, Robert Levitt, a principal of Levitt Capital Management LLP, who last year dumped all of his UK holdings, including both equities and government debt:
"The UK economy is in a worse shape than the US and most other European economies…The UK has had all the vices of the US -- high debt, property prices, an overvalued currency -- but they have been even greater"
Hedge-fund manager, the outspoken Jim Rogers, and well know bear on Western economies, said in the Financial Times the pound is a currency with no underpinning and should fall against the dollar and the euro. Summing up, he said: "It’s simple, the UK has nothing to sell."
Given the pervasive doom and gloom, and the somewhat dire economic outlook, including that the UK may have "nothing to sell", are share prices low?
Not Even Obama Knows All The Answers
I think some share prices are low. They may not rebound quickly, and there is always the chance they will go yet lower still.
Economically, these are unprecedented times. No-one, not even the man who currently walks on water, Barack Obama, knows when the global economy will turn around. It will turn of course, but it may have further to fall before it does turn. It's a long way of saying it's a bit of a guess.
There are three simple ways to mitigate your risk:
1) Invest with money you don't need to access for at least 3 years, preferably more.
2) Invest in the stock market on a regular basis, adding new money monthly or quarterly.
3) Invest for the long term, preferably over a minimum 5- to 10-year time period, ideally longer.
With those rules in mind, here are five FTSE 100 shares that might be worth taking a punt on. In this market, there are no guarantees, and you should definitely do your own research.
| Company | Share Price | Forward P/E | Forward Div Yield |
| Aviva (LSE: AV.) | 298p | 4.2 | 11.6% |
| BP (LSE: BP.) | 486p | 7.8 | 7.8% |
| London Stock Exchange (LSE: LSE) | 493p | 8.2 | 5.8% |
| BHP Billiton (LSE: BLT) | 1165p | 6.7 | 4.5% |
| Lloyds Banking Group (LSE: LLOY) | 45p | ?? | 0% |
A couple of comments:
1) Dividends may be cut, especially at Aviva. The market is effective saying it will cut its dividend, otherwise, in theory, investors would be piling into the shares. Perhaps they are not piling in because they are simply fearful, in which case, if the dividend is held or even raised, the shares will look very cheap.
2) The Lloyds selection is a pure punt. There is a decent chance the bank could be nationalised, in which case shareholders would likely end up with nothing. If the bank can get through this rather sticky patch, with its dominant share of the UK mortgage market, the shares could soar from here. If you are going to invest in Lloyds, make sure it is money you can afford to completely lose.
Absolute Bargains
From today’s prices, when we look back in 5 or 10 years' time, I'm confident we'll see how there were some absolute bargains out there in stock-market land in the early part of 2009.
Stating the obvious, picking the right companies is the key to success. For every Tullow Oil (LSE: TLW), up 1,250% over the past 10 years, there is a bankrupt Woolworths. The other key to success is to avoid a permanent loss of capital.
I could for example take a punt on a whole heap of distressed business, ones such as Punch Taverns (LSE: PUB) or Johnson Press (LSE: JPR), hoping one or two recover and earn me 10 times my money. But right now, there is more chance of shareholders being completely wiped out than of me making my 'investing' fortune.
Over at our premium share-recommendation service Champion Shares, Maynard Paton focuses intently on avoiding permanent losses of capital. In this market, he doesn't get it right every time, but he definitely makes sure the odds are stacked in his favour. For example, of the 24-strong Champion Shares portfolio, 19 companies last reported having a net cash position, as opposed to a net debt position. You can check out all his current recommendations now, for 30 days, for free. Just click here.
In closing, there are stock-market bargains about. The five companies highlighted above will hopefully do well over the long term. I wish you happy, prosperous and successful investing.
More: Time To Take A Punt On A Bank
> Of the companies mentioned in this article, Bruce Jackson has a beneficial holding in Berkshire Hathaway, BHP Billiton and Lloyds Banking Group, the latter bought at a much much much higher price than today’s.
