The FTSE 100 has been hovering around the 7,100 mark this week after falling from 7,600 earlier in June. This 500-points decline has left the stock market looking good value to an investor like me as it’s potentially a cheaper entry point for my long-term ‘buy and hold’ strategy. But I still need to be cautious as appearances can be deceptive.
Long-term gain
One of legendary investor Warren Buffett’s most famous quotes is “If you aren’t willing to own a stock for 10 years, don’t even think about owning it for 10 minutes”. The reasoning behind this is that it takes time for a company to grow and bring its share price (and perhaps dividend) up with it. Although it would be nice to ‘get rich quick’, hardly anyone does. The biggest gains are usually made over many years.
Another reason for buying and holding long term is that I reduce my trading costs. Day traders pay out a fortune to their stockbrokers from all that dipping in and out of the market, and an estimated 80% of them lose money. I will also receive the dividends they miss out on. As my investment timeline stretches years into the future I am not too worried about the stock market correction that’s happening now.
Timing
But there’s something else I need to consider before buying. Good timing of a purchase can be just as important as holding shares for a long-term gain — the two should always go together. I’m often wary of buying shares at their all-time high share price as, more often than not, the price will fall and I’ll kick myself for not being more patient and waiting for the opportunity of snapping them up cheaply. So with the FTSE 100 almost 5% lower than a month ago, I am now more confident that I’m buying shares at sensible values.
Buying shares with potential
Buying the right stock is also key to making money on my investment during market volatility. By this, I mean a company that the market usually rates highly and which has fallen in value primarily due to the market correction rather than something specific to the company causing it to fall.
It’s no good buying a stock that looks cheap, only for it to fall another 30% and take far longer to recover in the long term than other stocks. For example, well-regarded Legal and General shares appear to have merely fallen with the market as the company hasn’t released any trading statements or news recently, whereas easyJet shares have fallen with the market AND fallen further because of negative news specific to the company, such as flight cancellations and delays. Some investors might argue that this makes easyJet shares even more of a buy, as after its steeper fall, its recovery could be greater. But I’ll leave that for another article!
So, bearing the above in mind, on balance I am considering making some purchases. The old adage “buy low, sell high” is the ideal I aim for.
The risk to buying now is that the stock market may have further to fall, i.e. “don’t try to catch a falling knife”. However, recent interest rate rises appear to have stabilised markets.
