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The stock market may be volatile, but one analyst thinks a recession is far from inevitable and the recent falls have been valuation-driven.
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Should I invest in the stock market right now? To answer my own question I’d say, yes. If a long-term investor like me doesn’t go shopping for shares when valuations have fallen, when does he invest?
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Of course, it’s psychologically difficult to buy shares when they’ve been slipping. And the FTSE 100 index, for example, has been weak for a while. But I’d aim to seek out quality businesses with a decent runway of growth ahead. And it makes sense to buy them when their share prices assign a lower valuation. In five, 10, or 20 years’ time, I could be glad I did.
Such an approach has driven the solid returns achieved by billionaire investor Warren Buffett. He tends to buy stocks when everyone else is concerned about something. And there’s been plenty of geopolitical and economic news to fret about lately, if we choose to worry.
However, Ben Laidler, Global Markets Strategist at eToro, recently commented on the plunge of America’s S&P 500 index. He reckons a recession in the US “is not inevitable.” And to back up his theory he pointed to consumers with large savings and strong company earnings. Recessions, he argues, usually feature weaker company earnings as a major ingredient.
According to Laidler, the recent market sell-off has been “valuation-driven.” And I reckon it’s normal for the stock market to blow some of the froth from valuations from time to time. But it often takes a nice negative economic headline or two to jolt the market into action.
My feeling is that Laidler is on the money. And his assessment applies equally well to the UK stock market right now. But even if shares have further to fall, my lifelong approach to investing will likely make any further slide in the markets look like a minor blip over time. And that’s because the stock market has always bounced back from its lows. The Footsie, for example, started on 3 January 1984 at 1,000. And it’s around 7,280, as I write Wednesday (15 June).
However, it’s no good buying any old stock that has seen its share price fall. And it’s worth me remembering that all shares carry risks as well as positive potential. But Buffett is known for his focus on the strength of a business’s finances. And he seeks companies with a competitive advantage that can lead to robust profit margins and returns against equity and invested capital.
But even that’s not enough. He insists on an identifiable route to the growth of earnings. And, finally, he aims to buy at a “fair” price.
So I’m working hard on my watchlist. And it’s important for me to focus on the news flowing from the businesses that interest me. That’s better than putting too much emphasis on general economic headlines.
The general stock indices may be volatile. But the only thing that matters is whether each particular share price is offering me a good deal to buy a small slice of a decent business. It’s such focus that made investors like Warren Buffett great.
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Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Should you invest the value of your investment may rise or fall and your Capital is at Risk. Before investing your individual circumstances should be considered, so you should consider taking independent financial advice.
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Should you invest the value of your investment may rise or fall and your Capital is at Risk. Before investing your individual circumstances should be considered, so you should consider taking independent financial advice.
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