Just last week a member of The Motley Fool’s Share Advisor service popped up on our discussion boards asking if now was a good time to buy.
You see, he had concerns about the market being overpriced and was wondering if he should hold off on his next purchase.
His caution was perfectly understandable after the run we’ve seen this year.
I mean, during the first eleven months of the year, the FTSE 100 – the index for the 100 largest companies on the London stock exchange – was up almost 17%.
The FTSE 250 – made up of the next 250 largest companies – was up over 28%.
And if you were playing around in the small-cap end of the pool, you would have seen returns approaching 30%.
So, not too shabby. But how much longer can this bull run go on?
A fair question – and the very fact that I can’t answer it is why I don’t blame investors for being nervous.
However, I like to turn the question around on them and ask: why would this bull run stop?
Sure, scary headlines about…
- wage growth (or lack thereof);
- Europe;
- slowing emerging markets;
- hefty government debt levels, and;
- England facing Ashes ‘annihilation’…
…offer plenty of reasons for an end to the steady upward march of the markets.
But when have the markets ever been care-free?
Especially since the global financial crisis erupted, it has been hard to read any financial news source that wasn’t warning about some impending trigger of the next collapse.
And yet, markets have nearly doubled since their lows in 2009 and are now achieving new records.
So… has the run finally reached its end?
Maybe.
But you could have asked that question a year ago – after markets climbed 12% from the beginning of June 2012 – and come to the conclusion that things were overheated.
In fact, you could have said things were becoming overheated on several occasions since March 2009.
But… every time you concluded that things were out of hand you would have missed out on the coming returns.
Most recently, you would have missed out on the benefits of the government’s Help to Buy scheme – which has pushed shares in housebuilders such as Redrow, Taylor Wimpey and Barratt Developments up more than 60% this year.
Other companies tied to housing have also enjoyed a great run: property website Rightmove up 74%, kitchen-maker Howden Joinery up 86%, even once troubled tile shop Topps Tiles up 150%.
You may view those rises somewhat sceptically or argue that the best has passed already, but I’d argue you’re missing the bigger picture.
Sure, the homebuilders may have run away from you – they’ve ran away from me, too! – but that doesn’t mean there are no more opportunities in the market.
The trick is to pick next year’s winners today, rather than dwelling on yesterday’s missed opportunities.
Green shoots and green lights
The evidence is building that the UK’s recovery is gaining its footing. The US also looks like it has made strides towards a sustainable recovery.
Jobs data, business sentiment and GDP numbers are all pointing to things getting better. I’m not saying we’re out of the woods, but the darkness is lifting. And us investors need to keep an eye on the horizon.
The market is forward looking – after all, we’re investing in the future value of a company, not what it’s done during the past few years – so investors looking to partake in gains need to be forward looking, too.
When it becomes obvious that everything is better, the very best buying opportunities will have been and gone. So while markets may seem to be overpriced right now, we need to think about them in terms of a fully recovered economic world.
Uncertainty and bumpy roads abound but we don’t care
This isn’t to say the market will only go up from here.
In case you needed a reminder, we’ve seen the market give up a few hundred points since the end of October
And we may even see a quarter of slower economic growth somewhere down the road.
Nothing is guaranteed and the future will always hold surprises.
However, investors that put their money in strong companies with competitive advantages should be able to handle those surprises.
That’s what we look for at Share Advisor – the kinds of companies that can beat the market for years to come.
Usually that means looking for companies that can generate plenty of cash and employ great management teams that look after shareholders, but you never know exactly where such opportunities will present themselves.
Or when, for that matter.
Which is why me and the team at Share Advisor focus on great companies rather than where the market – or share price – is today or might be tomorrow.
Reading the future isn’t in my skillset, so I’ll leave that to others. I’d rather dig in and find companies that will grow their cash flow and shareholder value regardless of what the headlines say.
So is now a good time to buy? Well, I am still buying.
