Fear is contagious. It looks like another stock market crash is on the cards, making the FTSE 100 and FTSE 250 full of cheap UK shares.
But don’t panic Captain Mainwaring! I think now could be the perfect time to buy. Going against the heavy-footed herd running from their long-term positions offers me a brilliant opportunity.
We all know more lockdowns are probably coming.
But as value investors we don’t much care about what happens this week, next month, or next year. Our time horizon is much longer. Today’s prices only really matter if they offer us the chance to buy shares at a massive discount.
When to buy cheap UK shares
I follow Benjamin Graham — Warren Buffett’s mentor. He wrote in The Intelligent Investor, the bible for value investors, that the best way to profit long term is to buy from pessimists and sell to optimists.
“The market is a pendulum that forever swings between unsustainable optimism (which makes stocks too expensive) and unjustified pessimism (which makes them too cheap),” Graham wrote.
That this book is still supremely relevant 72 years after it was written is somewhat amazing. But it does speak to my point. Did I miss the chance to buy shares in the depths of March’s stock market crash? Don’t worry, there’s now a chance for another bite of the cherry.
It might sound a little flippant, but I would urge UK investors to be like me. Just zoom out and think of the bigger picture.
Because we are in the throes of a pessimistic market, it means there are cheap UK shares trading at really low valuations.
How to benefit from a stock market crash
I set aside exactly the same amount of money every month to put into my Stocks and Shares ISA. I’ve learned very quickly to live without this couple of hundred quid a month.
In fact I’ve worked out precisely how much I need to invest in cheap UK shares every 30 days to create a £1m ISA.
It’s a bit shocking, really. If only I’d thought of this idea sooner. I could actually have made a million pounds in an ISA many years earlier! But we are where we are. And the right time to start buying is just when everyone else is leaving the building.
Market routs, like we have now with the FTSE 100 at a six-month low, offer incredible value to long-term investors buying cheap UK shares.
Bear in mind that over a longer time horizon, the FTSE 100 has delivered outsized returns. Certainly more than inflation. Definitely better than Premium bonds. Far greater than gold.
What to do now
I think of the Rudyard Kipling poem, If, at times like this. “If you can keep your head when all about you are losing theirs…If you can trust yourself when all men doubt you…Yours is the Earth and everything in it. And what’s more — you’ll be a man my son.”
It’s unlikely Mr Kipling was thinking about the stock market when he wrote these famous words. But they are applicable all the same. My point? The stock market, the FTSE 100, all of it, will recover.
Now might not seem like a great time to buy cheap UK shares. But I think it could deliver outsized capital gains and dividend returns.
