A buy-and-hold investing strategy does what it says on the tin. It’s geared towards the long term, in that I would buy a stock and hold it for the foreseeable future. In theory, the chances of the stock price being higher in, say, 10 years is higher than over 10 days. Using this logic, I can hopefully generate even higher long-term returns from buying UK stock market bargains.
What’s a stock market bargain?
It may sound a simple idea to only try and buy UK stock market bargains. But a bargain to one person might not be a bargain for me. This is because it’s subjective. When I invest, I like to try and take subjectivity out of the equation as much as possible.
So in this case, I can try to set some parameters. For example, I can filter for companies with a price-to-earnings ratio that is below the average for the industry. I like to use the industry measure instead of the entire market figure. This is because ratios differ from industry to industry. Being more specific allows me to get a more accurate picture of whether the company really is a stock market bargain or not.
Another metric I can look at is the historical share price return relative to peers. If a stock has underperformed over the past year relative to the returns of its competitors, this could represent an opportunity to buy. The thinking here is that if I think the industry will continue to do well, I’d prefer to invest via a company that is potentially undervalued.
The risk with this thinking is that underperformance may be justified. The company might be struggling due to firm-specific factors. So although it could be a stock market bargain, I’d want to use several indicators instead of just this one.
Long-term mindset
Even with the FTSE 100 index up over 10% in the past six months, I still think there are good shares to buy right now. In fact, the buy-and-hold strategy helps me in this regard. Even if the companies I like take longer than expected to increase in value, it doesn’t matter. If I’m planning on holding the stock for a decade, the next few months is a small part of this.
As a result, I’d look to buy shares in areas that have been hit hard by the pandemic. I’m talking about banking, travel, tourism, and similar areas.
For example, take banks. Companies like Lloyds Banking Group and HSBC have underperformed over the past year when looking at a counterpart such as NatWest. So I could look to buy shares in these companies. Given the longevity of both these banks, I’m confident they will still be around in a decade or longer.
Overall, if I can pick good stock market bargains now, then with a buy-and-hold mindset my returns down the line could be very attractive.
