The UK economy is in the grip of high price inflation and it’s causing a cost-of-living crisis for many. But even those with the financial means to ride out the storm will be paying more for goods and services.
For me, it’s important to aim to preserve the spending power of my money. And that won’t happen if I simply bung it into a cash savings account. Even the highest bank interest rates can’t keep pace with inflation. Although I will always keep a modest amount of bank account cash on hand for emergencies and to meet my everyday needs.
Raising selling prices
But investing in FTSE 100 stocks may help to preserve my hard-earned. And that’s because underlying businesses often have the ability to raise their selling prices as input prices elevate.
If they can do that, it’s possible for them to preserve cashflows and profit margins. And share prices may rise a little to accommodate increased turnover and earnings. So, in theory, the rise in value of my investments could help to preserve the spending power of my invested money.
Of course, such outcomes aren’t certain. Businesses tend to struggle to keep up when prices rise rapidly because of sharp economic shocks. The arrival of the war in Ukraine is a good example.
However, I reckon that over long periods the theory is more likely to work out as expected. And that’s why it’s a good idea for me to adopt a long-term investment perspective when buying stocks and shares.
But short-term volatility in markets can be the long-term investor’s friend. And that’s because businesses may suffer near-term hits to their profits causing weaker share prices and lower valuations. In many cases, it’s happening now.
Many investors have seen weakness in their portfolios this year because of falling share prices. And those lower stock prices and better valuations could be a decent buying opportunity for investors with a long-term focus.
Searching for competitive advantage
However, just like billionaire investor Warren Buffett, I’d aim to be selective and only buy stocks backed by the best businesses. For me, that means looking for enterprises with products and services commanding pricing power due to some kind of competitive advantage. Buffett often describes such businesses as possessing an economic moat. And hard-to-get-past moats can come in several forms.
For example, a business may possess strong brands with high customer loyalty. It could enjoy economies of scale. There may be high customer switching costs. And another is the presence of network effects attracting customers to the services of the business.
However, it’s possible for me to identify such traits, buy shares at a reasonable valuation and still struggle to make money with stocks. Indeed, all businesses can face operational challenges from time to time. Nothing is guaranteed when investing in stocks and shares.
Nevertheless, there are several promising FTSE 100 candidates on my watchlist. For example, fashion and lifestyle retailer Next, fast-moving consumer goods company Unilever and medical technology business Smith & Nephew. I’d dig into these opportunities with further research now with a view to holding their shares for the long term.
