I’m hoping for one major thing from next month’s general election. What I want is an end to the crushing uncertainty that’s been bearing down on businesses and the stock market since the in/out referendum regarding the UK’s membership in the European Union.
With a bit of luck, we’ll end up with a majority government that will be able to get things done. And one of the main things is that the new government will be able to pursue is its policy regarding Brexit.
With that situation, we’ll all know where we are going, and businesses will be able to plan and invest accordingly.
Has Brexit been holding shares back?
But has the whole Brexit ‘thing’ been holding share prices back? Some of them, maybe. For example, a big part of the Woodford Funds investment strategy in recent years seemed to be based on the idea that UK-facing shares were undervalued because of uncertainty in the outlook.
However, I don’t think Woodford’s investing idea was all that sound on that point. I looked at a lot of the shares in his fund and saw many cyclical companies trading near the tops of their earnings cycles. Where Woodford appeared to see undervaluation, I saw normal valuation. To me, cyclicals should have low earnings multiples and high dividend yields when there’s a strong possibility that earnings could cycle down in the near future.
But the whole scenario serves to underline the difficulties we face if we approach the stock market with a strategy that relies on timing. Instead of trying to time the market, I reckon a better idea is to concentrate on putting shares in your portfolio that are backed by good-quality underlying enterprises.
And that’s where I reckon Woodford went wrong. Instead of quality, in many cases, the Woodford portfolio held speculative shares and cyclicals. I just don’t consider cyclical companies to be of good quality.
Looking for shares in a strong trading niche
At the other end of the continuum of stocks from the cyclicals, we have the defensives – those consistent, cash-generating, and dividend-paying beasts operating in a strong trading niche. The defensives don’t suffer as much as the cyclicals when it comes to a general economic down-turn. Instead, they just tend to keep on generating cash inflow and churning out dividends that rise a little each year.
And those defensive, high-quality shares are what I’d target before the election, and after the election, and before Brexit, and after Brexit and for evermore!
Many of them have robust international operations, so whatever might be going on economically and politically in the home country can be a mere sideshow anyway.
However, I reckon it pays to invest at least £1k in each individual company in order to make the transaction costs of trading worth paying. So that implies investing several thousand to ensure that you diversify across a few names.
A great alternative is to invest in the market itself by putting money into tracker funds. As a starting point, I like those that follow the FTSE 100 index, the FTSE 250, and America’s S&P 500.