Many people think about investing in shares, but keep putting it off. Maybe they feel they need more money, or want to wait for a stock market fall in the hope they can scoop up shares at bargain prices. So when is the best time to start buying shares?
The perils of market timing
The idea of waiting for a stock market fall before buying shares has an intuitive appeal. Why pay more if you can pay less? But in reality, I think it can be tricky to know what the market is going to do next. Hordes of professionals are employed to do just that and even they often have a hard time figuring out what to expect.
On top of that, the stock market is, in reality, a market of individual stocks. So if the overall market goes down, that does not necessarily mean the specific shares I would like to buy will become cheaper.
Looking for value
If I do not wait for a market fall however, how could I decide whether or not to buy certain shares at any given moment?
The first part of the process is all about identifying what I think look like great businesses. By that, I mean a company that looks set to make strong profits far into the future. That might be because it owns unique brands, like Unilever, or has a piece of infrastructure that cannot easily be copied, like Jersey Electricity.
Such assets are useful because they provide a competitive advantage that it is hard to match. That helps give the firm pricing power – the ability to set its prices at a profitable level without worrying too much about being undercut by a rival.
Then I would consider what I think the firm is worth. There are lots of different ways to value shares. One that I use is the discounted cash flow model. Basically, I look at what free cash flows I expect a company to earn in future, discounted for the reduced value of money over time. If that is bigger than the current enterprise value, the shares may be good value.
Enterprise value involves looking at a company’s market capitalisation – but also its balance sheet. After all, if it needs to pay large debts, that reduces how much money may be available in future for shareholders.
I’d start buying shares today
No matter what is going on in the stock market, some companies will look overpriced. But, hopefully, there may also be some that seem undervalued.
That is why I think the time to start buying shares is often right now. Rather than waiting for the perfect time, I focus on finding the right shares trading at an attractive price. If I choose companies that do well hopefully, over time, I can build a growing portfolio by starting from a few early steps.