The FTSE 100 (the UK’s main market index) is bouncing up and down like a yo-yo this month. History tells us that share prices often weaken during the summer months, but this market is even more skittish than usual.
But then why shouldn’t global share prices be volatile – and even irrational – when investors have so much to worry about? As well as the life-changing impact of the pandemic lockdown, we have fears of a second wave (or rolling waves) of coronavirus cases. And on top of all that, there are concerns about the US-China trade deal falling apart. What times we live in, eh?
The FTSE 100 is an index, not a crystal ball
Of course, it’s important to remember that the FTSE 100 is just an index that tracks the ongoing value of its 100+ constituents. What the movements of the FTSE 100 don’t do is tell you anything about the current financial health (and future business success) of any individual member.
As billionaire Warren Buffett wisely remarked, “In the short run, [the market] is a voting machine; in the long run, it’s a weighing machine”. What the legendary investor means by this is that stock values can (and will) be volatile and irrational in the short term. But the weight of company earnings will determine long-term share prices.
For value investors, time heals all wounds
For me, there seems to be a pattern developing recently. I write about beaten-down FTSE 100 value shares, only for their prices to dive immediately after publication. That said, I know I’m not jinxed, because such superstition is nonsense. All that’s happening is bargain shares I’ve highlighted keep getting progressively cheaper as the wider market lurches downwards.
At times like this, I remember another Warren Buffett mantra: “Falling prices are good for buyers”. When shares in quality, well-run FTSE 100 businesses keep getting cheaper, they also become better bargains. When you’re looking at a 10- or 20-year time scale, short-term price movements are easily outweighed by long-term corporate performance.
Thus, as an avowed value and high-yield investor, I’m not worried about the FTSE 100’s movements this week, month, or year. I look ahead to a lifetime of delicious dividends with, ideally, some share-price growth thrown in.
Can you be sure of Shell?
I’ve written about £103bn giant Royal Dutch Shell (LSE: RDSB) several times during this market crisis. Despite being one of the FTSE 100’s very largest members, Shell shares have been at least as volatile as the wider market. What’s more, they keep getting cheaper.
In 2019–20, Shell shares have been on a roller coaster, ranging between a low of 890p on 19 March and a high of 2,647p on 1 July 2019. Shell was worth almost three times as much a year ago as it was during the March depths. That’s bonkers.
Certainly, the coronavirus is making it difficult to value shares right now. What’s more, on 30 April, Shell announced a 46% fall in its first-quarter net income and slashed its double-digit dividend yield by two-thirds. Even so, with shares trading at 1,290p, they are almost exactly half where they were a year ago – over £100bn of Shell’s value vanished in 12 months. With the oil price recovering from its March lows, that makes no sense to me. I’d buy FTSE 100 giant Shell today, both for its future dividends and for potential capital growth.
