Choosing which shares to buy comes with a lot of choice. That’s why I try to find ways to make it easier to weigh up the pros and cons of different companies. When considering which UK shares to buy today, I could think about my choices the way I approach a curry menu.
Let me explain.
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The safer choices
A large part of any curry menu is given over to unadventurous choices. There might be a misplaced spice or an unexpected flavour, but a korma or butter chicken is often seen as a comparatively safe choice.
That’s also how I think about long-established, large companies in stable industries, like National Grid or Unilever. These sorts of shares might not be very fast growing. The dividends are decent – 5.4% and 3.5% respectively – but they’re far from the hottest on the market. But I would consider such UK shares to buy today for their defensive qualities. Future customer demand will likely hold up and the companies can hopefully translate pricing power into profits.
Even a supposedly mild curry can give a surprise sometimes, though. For example, people working from home could lead to lower revenues for National Grid if commercial electricity use falls. Ongoing lockdowns in some markets could eat into Unilever’s foodservice revenues.
Spicy UK shares to buy today
I’d also consider some shares which are a bit spicier. Like a biryani or tikka masala, they might seem quite mild but suddenly become a lot more striking.
Companies in cyclical industries such as mining can be like this. Shell didn’t cut its dividend for over seven decades, then last year as oil prices fell the company reduced its payout sharply. Antofagasta rose 140% in a year to last month as copper prices soared, but has eased off since.
This can also happen with companies heavily focussed on only a few business areas, if one of them suddenly underperforms. Consider Associated British Foods. It’s usually seen as a fairly mild sort of company: well-run, with stable revenues and a solid business strategy. But its Primark division brought risks many investors hadn’t fully appreciated. A lack of digital sales channels meant that lockdown led to Primark sales plummeting.
Just like the part of the curry menu with lots of chili symbols, some corners of the financial pages are very spicy. From dramatic price swings to exotic business plans, they sometimes offer very tasty returns – but also a lot of pain. Are these UK shares to buy today for my portfolio – or should I simply steer away from that part of the menu altogether? I prefer to invest rather than speculate, and spicier shares often seem closer to speculation.
New business areas throw up a lot of such spicy shares. That’s because investors struggle to value them accurately. Currently, cryptocurrency miner and data centre operator Argo Blockchain is an example. A key risk here is that a change in cryptocurrency valuations will affect the share price. That is outside the company’s control but remains a risk.
Curry and mental models
Doing research helps me understand which companies may have promising prospects. I use what Charlie Munger calls “mental models” like my curry example as an easy reminder to myself to weigh opportunity with risk, even if it means missing out on some of the tastier looking options.