It’s common for investors to watch the UK shares indexes such as the FTSE 100 and FTSE 250 among others.
And we tend to feel good when they’re going up and anxious when they’re falling – at least I do!
So, the latest setback in the markets is making me nervous right now.
But that kind of emotional reaction flies in the face of the advice billionaire investor Warren Buffett gives us. He reckons we should switch those feelings around and be glad when markets are falling and anxious when they are rising.
Watching valuations
At least that’s true of his advice if we’re long-term buyers of stocks and shares. And that’s because lower general markets can sometimes depress the valuations of individual stocks. So, if we buy when they’re down, in theory we can sometimes get more for our money in terms of value.
However, that isn’t always true. Nothing is that simple with stocks and shares. And sometimes businesses deserve their lower valuations. One example happened when the pandemic struck. And Buffett himself dumped his airline stock holdings rather than buying more.
Meanwhile, when markets are going up Buffett is usually on high alert for stretched valuations that are too high. That doesn’t necessarily mean he’ll rush out and sell the over-priced stocks he might be holding. But it does likely mean he won’t buy more stocks because they all look too expensive.
But when we as investors are holding stocks and shares, we usually want them to go up over some time frame. And that’s so they give us a decent return on our investment on top of any dividends collected along the way.
The situation circles back to the common habit of watching the markets and forever wondering whether the next move for UK shares will be up, down or sideways.
Focusing on individual businesses
However, aiming to time investments in stocks and shares by watching the main share indexes is fraught with difficulty. And the habit can send out misleading signals.
Stock markets are driven by underlying business progress and by investor sentiment. Therefore, the amalgamation of many stocks in one index has little value to investors.
What’s important is the operational progress of the individual business we want to buy or hold shares in. And the sentiment of investors towards that one stock and business.
That said, the UK stock market has been depressed for some considerable time now. And general investor sentiment has been poor. So that malaise has weighed heavily on many individual companies.
The chances of finding businesses and stocks with sensible valuations is now elevated after recent market falls. Meanwhile, many underlying enterprises have been trading well and growing their earnings. And I reckon an enduring bull market may arrive soon.
Therefore, I see the general environment for UK businesses and their shares as being favourable for investors. And it could be a chance to get richer with cheap UK shares. But good stock-picking backed by thorough research is still key to success in the markets.
Positive investment outcomes are never certain. But it’s often better to buy when valuations are depressed and just after a market correction.
