The economy does not seem to be doing that well. Inflation is very high. A recession is expected. Despite that, the FTSE 100 index of leading shares has moved up 5% in the past year. Does that mean this is a frothy stock market out of touch with economic reality? Or could the buoyant market still offer opportunity?
In other words, if I wanted to start investing, would I dive in today – or wait in the hope of share prices falling?
The challenge of market timing
The easy answer is that nobody knows what will happen next in the stock market. Lots of investors have very strong opinions. But how things will actually turn out is unknown.
That makes it difficult to time the market. It is always possible that it could crash unexpectedly. Equally, the market could continue to rally. Nobody knows.
A market of stocks
But if the next market moves are unclear, how could I decide whether now might be a good time to start investing?
One way would be to move from a high level view to a more detailed one at the level of individual shares. As the old adage goes, it is a market of stocks, not a stock market. In other words, the FTSE 100 and indeed any other share index reflects the change in value of a basket of shares. A sports team can perform poorly despite some players playing brilliantly. It is the same in the City. Whatever happens next to the stock market overall, some individual shares may perform very well in coming years.
The challenge is to find them!
Finding shares to buy
So, in principle I think now could be as good a time as any to start investing – depending on what shares I bought. How would I choose them?
I focus on a couple of things when buying shares. The first factor has nothing to do with the stock market at all. It is purely about the quality of a given business. Can a company make profits in future? To assess the likelihood of that, I would look at its business model. If it has a competitive point of difference in a market I think will see ongoing customer demand, it may be able to turn that to its advantage.
But the second thing I look at when looking for shares to buy for my portfolio certainly involves the stock market. If I think a company has strong prospects, could its current share price still offer me value?
Ignoring stock market noise
If a share offers me value, I ignore the wider stock market noise and consider buying it for my portfolio.
For example, polymer maker Victrex is over 30% cheaper today than it was a year ago. There are risks to the company’s profitability, such as increasing energy bills. But I think its proprietary technology gives it a competitive advantage, while its current share price looks attractive to me from a valuation perspective. I follow the same principles when buying individual shares, no matter what is going on in the wider stock market. That is why I think it can always be a good time to start investing – as long as one focusses on quality businesses selling at attractive valuations.