There are around 2,000 ISA millionaires in the UK. And most achieved their millionaire status by investing regular sums of money in Stocks and Shares ISAs over the past 30 years or so. And right now, I’m seeing many FTSE 100 shares to buy.
The terrible conflict in Ukraine has accelerated a bear run that was already in progress for many stocks. And in the months prior, analysts had been calling for a correction because many businesses had become over-valued. And over-valuation is potentially harmful to long-term shareholder returns. The problem is that price-to-earnings multiples tend to revert to the mean over time, meaning they normalise. And that often happens because share prices fall.
Over-valuation can lead to poor investments
The last thing we need is a weak share price causing us to lose money in an investment. Even when an underlying business continues to trade well and grow, share-price weakness can keep an investment underwater for years. And that’s why great investors such as billionaire Warren Buffett pay so much attention to valuation. He knows if he buys what he calls “wonderful” businesses at fair prices, he’ll have a much better chance of achieving a positive long-term investment outcome.
The alternative can be grim. And shareholders taking new positions in over-valued stocks spent much of 2021 discovering what that feels like. Indeed, US and UK stocks trading at racy valuations spent months plummeting. And some have fallen by mind-boggling percentages, such as 50%, 60%, 70% and even 90% or more. The big lesson for me has been that valuation matters. It matters now and it matters when stocks are shooting higher in a major bull run. In short, valuation always matters!
And that’s why bear markets, setbacks, corrections, crises and other events can provide a well-stocked hunting ground for the long-term investor. It’s at times like we have now that Buffett most often finds his enduring long-term investments. Although psychologically, it can be hard to buy stocks during a crisis when the news is grim and share prices have been falling.
A focus on specific businesses
The best way I’ve found to muster up the courage to act is by ignoring the general market. So I stop watching the FTSE 100 and other indices. Instead, it can pay to focus on the individual stocks on my watchlist and tune in to the news flowing from each company.
And we’ve seen some big downwards stock moves among big-caps in the FTSE 100. Those moves don’t in themselves ensure a better-value purchase. But I do see them as a jumping-off point for further research. For example, at 5,561p, fast-moving consumer goods company Reckitt is down around 12% since the beginning of March. And it’s about 9% lower than it was a year ago. I’m also watching paper-based packaging manufacturer Smurfit Kappa. The stock is 28% lower than it was around 18 February and it’s down 15% over the past year.
There’s no guarantee of a positive investment outcome even when valuations reduce because of lower share prices. All stocks carry risks as well as positive potential. But my plan is to compound the gains from careful FTSE 100 investments over many years. And I’m aiming to build my ISA up to the value of £1m as others have before me.
