There’s a Chinese proverb that goes something like “the best time to plant a tree was twenty years ago, the second best time is today”. For investors, the message is the same: the best time to start investing might have been two decades ago — but today will do just fine.
And with the ISA year closing on 5 April, “today” has a rather more literal urgency than usual.
Compounding to financial freedom
For most of us, the most powerful force in investing isn’t stock-picking skill or market timing. It’s compounding. This is the process by which returns generate their own returns, year after year.
A £10,000 investment growing at 10% annually becomes £73,000 after 20 years. Wait five years to start, and that same money only reaches £45,000. The cost of delay is enormous and that’s all because of compounding.
And history suggests the stock market has rewarded patient investors handsomely. Some companies have delivered returns that would have seemed almost unimaginable at the time of purchase.
Amazon — once dismissed as an overvalued bookshop — has turned early believers into millionaires many times over. Nvidia was just a graphics chip maker for years — it’s become one of the most valuable companies on earth on the back of the AI revolution.
But investors don’t need to look only to Wall Street for examples.
Closer to home, Jet2 (LSE:JET2) — the Leeds-based package holiday operator — has been one of the great long-run success stories on the London market. The company has quietly compounded shareholder wealth over the past two decades.
None of these were obvious at the time. The investors who benefited most weren’t necessarily the smartest in the room. They were simply the ones who started early and let compounding do its work.
Be greedy when others are fearful
From a Chinese proverb to the oracle of investing. Warren Buffett famously tells investors to be greedy when others are fearful, and vice-versa.
And, right now, investors are fearful. The market has entered corrected territory and this could be precisely the kind of moment Buffett had in mind.
Jet2, unsurprisingly, is one of the companies most impacted by the sell-off. The company’s fortune are directly linked to oil prices (jet fuel prices) which have surged since the start of the war in the Gulf.
Yet, it’s important to note that Jet2 has hedged its fuel needs and that provides a degree of insulation against near-term volatility in prices.
And, of course, the war won’t last forever — we all hope so, anyway. When it ends, oil prices should normalise, and much of the current concern could disappear almost overnight.
What remains is the valuation. And that’s where the real opportunity lies. The sell-off has pushed Jet2’s shares to a level that looks incredibly cheap relative to its earnings power. This is also at a time when the long-term picture remains entirely intact.
The stock is currently trading around four times forward earnings when we account for net cash. That’s half where its peer group sit.
Demand for package holidays is structurally inelastic and Jet2’s reputation for customer service is arguably the best in the sector.
The risk, of course, is a very prolonged conflict. However, I don’t see that happening. Jet2 is well worth considering.
