Last week, I voiced my concern that share prices, particularly those in the US, looked primed for a fall. Since then, markets have indeed headed south. Rather than ruminate on the exact reason as to why this has happened now (it’s most likely down to a combination of factors), I’m turning my attention to how I can take advantage by buying the best UK shares.
What happens next?
Here’s the bad news. Whether markets continue their downward descent in March is pretty much impossible to say. There are simply too many variables involved.
This being the case, it’s vital to separate signal from noise and only use the former to our advantage. In other words, investors need only concentrate on what they know or can control.
What we do know is that markets have always recovered over time… it’s individual companies that don’t. This being the case, it’s surely far more productive to look for high-quality businesses to buy on temporary weakness than it is to fret over whether global markets rise or fall on Monday.
What do the best UK shares look like?
It’s subjective, of course. Nevertheless, I look to separate the wheat from the chaff using the following checklist. I want companies I invest in to:
- Solve a problem (if it doesn’t, why would anyone buy what it sells?)
- Be profitable (companies actually making money will always be more resilient than those dependent on hype)
- Offer multiple products (one-product companies are risky if fashion/demand changes)
- Generate repeat business (thus allowing me to be more confident on earnings)
- Have low/no debt (allowing a business to survive an inevitable crisis or two)
- Have great returns on capital (it makes lots of money from the cash it invests in itself)
Although there’s no such thing as a perfect company, many of my personal holdings tick many of these boxes. This explains why I’m invested in drinks firm AG Barr, laser-equipment supplier Somero Enterprises, kettle safety firm Strix and comparison website Moneysupermarket.com.
Slow and steady
Buying even the best UK shares at a time when markets are falling takes guts. This fact is obvious when all is well but it can be hard to remember when the chips are down.
I’m as susceptible to fear and greed as anyone else. In an effort to counter this, I think the most appropriate response is to adopt a ‘slow and steady’ approach. In practice, this means investing my money gradually. I may not be able to time my purchases perfectly but I’ve never met someone who can. The danger of trying is that the recovery happens before putting any capital to work. Ultimately, I may end up paying more than I wanted to.
A slow and steady approach isn’t perfect. In theory, the more times I buy, the more commission I will incur. This is a problem since costs can have a huge impact on a portfolio’s performance over time, regardless of how good the actual investments are. One way I work around this is to take advantage of ‘regular investing’ plans that buy on the same date each month, vastly reducing what I pay.
Ignoring the noise, finding the best UK shares to buy and keeping costs low is no guarantee of success, but it’s how I’m handling this latest market crash.