A rising stock market inevitably makes it more difficult to find stocks to buy. Shares that were trading at bargain prices not so long ago have started to become less attractive than they once were.
Investors struggling for ideas shouldn’t panic though. Charlie Munger – Warren Buffett’s former right-hand-man at Berkshire Hathaway has some advice that I think is worth paying attention to.
Finding stocks to buy
Bunzl‘s (LSE:BNZL) a good example of the kind of thing that’s been going on with the stock market lately. At the start of May, the stock was trading at a price-to-earnings (P/E) ratio of 18.5.
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That’s unusually low for this business, but investors are feeling much better about the company than they were a couple of months ago. It’s back up to a P/E multiple of around 25 as a result.
Bunzl P/E ratio 2014-24
Created at TradingView
A couple of things have happened since July. One is the company’s issued a trading update that included widening margins, a share buyback programme, and a 10% dividend increase.
The other is that interest rates in the UK have started to fall. This has provided a boost to share prices in general, including Bunzl.
I’m not actually convinced this is a good thing for the underlying business. Bunzl’s looking to keep making acquisitions to grow and lower interest rates could make these more expensive.
All of this means I don’t think the stock has the same potential at the moment. And that’s a pity, because it means I have to look elsewhere for shares to buy.
Opportunities
As Munger points out, great investment opportunities aren’t always easy to find. At the Daily Journal Annual Meeting in 2019, Munger said: “The whole trick of the game is to have a few times when you know that something is better than average and to invest only when you have that extra knowledge. And then if you get just a few opportunities, that’s enough.“
Munger’s point is that the stock market isn’t routinely flooded with shares in wonderful businesses trading at bargain prices. And that’s ok – finding a few over an investing lifetime can be enough.
Investors therefore shouldn’t worry if nothing’s screaming out at the moment. As long as enough good chances show up eventually, great results are possible.
Importantly, Munger also said that investors have to recognise great opportunities when they do arise. Since they don’t come around often, being able to take advantage of them is crucial.
That means constantly looking for outstanding companies with great business models and durable competitive advantages. Then it’s a question of waiting for the right prices.
What to do?
There’s an obvious question of what to do in the meantime though. With interest rates falling, I’d rather own equities – even if nothing specific stands out – than accumulate cash.
One possibility is to invest in a fund that tracks an index like the FTSE 100 or the S&P 500. That would allow me to participate in a rising stock market without having to find individual stocks to buy.
Over time, I’d rather look to take advantage of specific opportunities. But when they’re hard to find, a diversified fund could be a good alternative.
