A quick look at the financial headlines these days shows there is a lot going on. From rampant inflation hurting profits to uncertain customer demand, many businesses are expecting challenging times ahead. That has driven down some share prices. The FTSE 100 index has fallen 2% in the past year and 6% so far in 2022. So if someone wanted to start buying shares, would it make sense to do so now?
What is the stock market?
I think it is helpful to draw a distinction between the stock market and individual shares.
The stock market is a collection of shares in different businesses. Each performs in its own way. Just like a cricket team may do badly while an individual batsman does well, a falling stock market does not mean that all shares will sink in price. The reverse is also true. Even when stock markets soar, some shares may lose value.
That is why even a market crash is not necessarily bad news for all stocks.
When to start buying shares
Put like that, I do not think it is helpful to think in terms of a “good” or “bad” time for investors to start buying shares. Rather, what matters is the specific shares one might choose to buy.
That reflects the difference between different investing mindsets. One approach is simply to see share prices as numbers. By trying to buy a share when the price is low and sell when it is high, one could attempt to make a profit.
But what makes a share price low or high? In the short term, there may be impacts from wider market trends. But over the long term, I think most share prices broadly reflect the prospects of the underlying business. That is why I do not invest simply by looking at share prices. Instead, my investment strategy is to try and find businesses I think have a great future. If I can buy a small piece of that business at what I think is an attractive price, then I may add it to my portfolio.
So I think now could be as good a time as any if you wanted to start buying shares – as long as you were focussed on purchasing pieces of strong businesses at an attractive price.
Buy and hold investing
Even good businesses can be horribly mispriced by the stock market in the short term. So just because I started buying the sorts of shares I discussed above would not mean they won’t fall in price, perhaps even by a lot.
But as a buy-and-hold investor, I am looking to the long term. Companies such as Unilever, Tesco and Diageo may face challenges like inflation or lower customer demand, pushing down their share prices. But five or ten years from now, I expect the underlying strength of the business will mean that many such companies do well. If I start buying shares in a diversified range of companies, one or two of them disappointing me will hopefully not drag down my overall portfolio too much.
The key question for me is not “should I invest on any given day”; instead, it is “how can I find promising companies I can buy into when their shares trade at an attractive price”!
