The stock market is suffering from an attack of uncertainty. Inflation is surging and the UK (and other countries) could be heading into recession. So why do I believe now’s a good time to be investing in shares?
The simplest answer is to borrow from Warren Buffett. The billionaire investor once said that “you pay a very high price in the stock market for a cheery consensus.” Like Buffett, I prefer to buy shares when they’re cheap. Here’s how I do it.
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Too soon or too late?
Some shares on my watchlist are already down 20% so far this year. The trouble is, I don’t know if they’ll keep falling, or if they might start to recover.
In reality, there’s no reliable way to time the market. What I do instead is to buy shares regularly, in stages. That way, if prices keep falling, my average cost price will be reduced by the cheaper shares I’ll buy later on.
This technique is known as pound-cost averaging (or dollar-cost averaging in the US). It helps me to make a profit on stocks even if they don’t perform as well as I’d hoped.
Profiting from falling shares
For example, let’s take a fictional company called Big Widgets. Unfortunately, its share price keeps falling from now until September, when it stages a recovery to end the year flat.
Let’s imagine that over the next three months, I invest £1,000 per month in Big Widgets:
|Date||Share price||Average cost price|
|31 December||100p||Profit = 18%|
By the end of the year, my Big Widgets shareholding is showing an 18% profit, even though the stock is unchanged from the date of my first purchase.
By buying gradually, I’ve caught the bottom of the market and made a profit even though the shares ended the year flat.
Of course, if prices rise, I won’t do so well. Pound-cost averaging into a rising market will mean I make less money than I would if I bought all my shares at the start.
For me, this risk is worthwhile because I know I can’t time the market. So I’m happy to settle for a more reliable approach that should increase my chance of consistently making some profit from my investments.
Investing in shares: what to buy?
Buffett once said that “price is what you pay, value is what you get.” I think his point is that it’s always important to consider valuation when investing.
My focus right now is on finding stocks that are conservatively valued and have the potential to generate reliable profits for many years to come.
Obviously, it’s impossible to be certain what the future holds. But I reckon there are some reliable clues to good companies. Some of the things I look for are strong brands, good market share and above-average profit margins.
In the FTSE 100 today, I’m looking at companies such as Unilever, DCC, Mondi and Imperial Brands. I’m also tempted by Airtel Africa and NatWest Group.
There’s no guarantee any of these stocks will be successful investments for me. But if I stick to my process and buy shares in good businesses when they’re cheap, I hope to do well enough to beat the market, over time.