Among the great modern investors, one name stands head and shoulders above the rest. For me, the world’s greatest investor is Warren Buffett, chair of US mega-conglomerate Berkshire Hathaway.

Warren Buffett (92 in August) has been investing in stocks since age 11. After 80+ years of outstanding returns, he has a personal fortune of $103.7bn. Yet he has donated over $49bn to good causes and intends to give 99% of his fortune to charity. Wow.

Warren Buffett loves owning insurers

Warren Buffett manages a diverse group of businesses under the Berkshire Hathaway umbrella. These include insurance companies, a major railway, a battery maker, clothing and jewellery firms, and fast-moving consumer goods businesses. Today, Berkshire is worth a whopping $655bn. But it’s well known that Warren Buffett loves the economics of insurance companies.

Indeed, one of four pillars of Berkshire Hathaway’s success is its various insurance subsidiaries. These companies collect insurance premiums upfront, but pay claims later. This generates a ‘float’ of cash and traded securities that gets invested to boost company returns. In 2021, Berkshire Hathaway’s float made the group $9bn. Nice.

“Price is what you pay; value is what you get”

Warren Buffett made the above comment in his 2008 letter to Berkshire shareholders. And I know that, as a value investor (like me), he loves to buy shares in quality businesses when they are discounted or on sale.

I’ve spotted one well-known, well-respected UK insurer that Buffett could buy on the cheap, presently valued at under £2.7bn. My ‘Buffett business’ is leading UK insurance provider Direct Line Insurance Group (LSE: DLG). For the record, my wife bought Direct Line shares in late July at an all-in price (including stamp duty and buying commission) of a whisker above £2.

Five reasons Buffett should buy Direct Line

Though I’m guilty of talking up my own book here, if I had a spare £3bn+ lying around, I’d happily buy Direct Line outright. In reality, any takeover bid would have to be pitched at a substantial premium to the current market value, but you see my point, right?

Here are five reasons why I’d urge Warren Buffett to snap up this FTSE 250 firm:

1. Below £4bn is pocket change for Berkshire Hathaway, which has a cash pile of around $70bn (and growing fast).
2. Direct Line has great consumer brands (including its famous red telephone on wheels) and over 13.2m policies in force across a wide range of competitively priced insurance products.
3. It has a strong balance sheet, with a ‘solvency capital ratio’ 52% above the regulatory minimum.
4. The company’s dividend yield of nearly 11.2% a year is one of the highest in the FTSE 350 index.
5. Though this cash yield is covered only 0.9 times by trailing earnings, the group has no current plans to cut this payment.

Also, on the price/value front, Direct Line shares hit a 52-week high of 313.7p on 19 January, more than 50% above their current price of 203.4p. For me, Warren Buffett should run his rule over DLG before it gets more expensive. But storm clouds (inflation, energy bills, higher interest rates) are gathering over UK consumers and could harm corporate earnings, so I could well be wrong. Still, I have long-term hopes for this stock, so I may buy more shares!

More reading

Cliffdarcy has an economic interest in Direct Line Insurance Group shares. 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.

Having worked in the financial industry for over 15 years, I think I have a reasonable grasp of the UK’s banking, insurance, and investment sectors. Over the decades, my industry experience led me to buy shares in various companies in these fields. Recently, I realised that I haven’t owned NatWest Group (LSE: NWG) shares since the global financial crisis of 2007-09. Is November the month to correct this oversight?

NatWest shares have dived since August

As I write (on Monday afternoon), the NatWest share price stands at 232.1p, up 7.2p (3.2%) today. This gain makes NatWest shares the third-biggest riser in the FTSE 100 index today. However, this popular stock has fallen hard since hitting its 2022 peak in the summer. Here’s how NatWest stock has performed over six timescales:

Shares in the former Royal Bank of Scotland group have bobbled up and down over the past 12 months, but have lost nearly a quarter of their value over five years. (These figures exclude cash dividends, which would boost returns by a few percentage points a year.)

Yet on 17 August, NatWest shares were riding high, hitting their 2022 intra-day high of 284.42p. Since then, they have slid by more than 50p, losing almost a fifth of their value (-18.4%). So has this FTSE 100 stock dropped into Mr Market’s bargain bin, or is it a classic value trap?

NatWest stock looks fairly cheap to me

For me, the NatWest brand will forever be tarnished due to its ownership by RBS, the worst-managed bank in Britain. During the global financial crisis, RBS came to the very brink of collapse before being bailed out by British taxpayers to the tune of £45.5bn. Crikey.

That said, NatWest is run along much more conservative lines nowadays — and it finally ditched the RBS brand in July 2020. At present, the group is valued at £22.6bn, making it the smallest of the UK’s ‘Big Four’ banks. But after recent falls, NatWest shares look inexpensive to me.

At the current NatWest share price of 232.1p, this stock trades on a price-to-earnings ratio of 9.4. This translates to an earnings yield of 10.6% — almost 1.4 times the FTSE 100’s yield of below 7.7%.

What’s more, NatWest’s dividend yield of 5.1% a year is a full percentage point above the Footsie’s cash yield. In addition, this yield is covered 2.1 times by earnings, which suggests to me that it is both solid and has plenty of room to grow.

Dark clouds are gathering

Now for the bad news for British banks. Consumer confidence is being shattered by soaring inflation, sky-high energy and fuel bills, rising interest rates, and the growing risk of a deep recession. All of this — plus a weakening property market — spells bad news for large lenders in 2022-23.

Currently, I don’t own NatWest shares and I’ve decided not to buy for now. I do like the look of this business and its share price, but my family portfolio already has exposure to two other major British banks. So, despite NatWest’s attractive fundamentals, I won’t buy shares in the bank in November. Instead, I’ll look for good value in another sector of the FTSE 100!

More reading

Cliffdarcy 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.

Over the past 35 years, I’ve gradually realised that investing is as much an art as it is a science. Also, I’ve learnt that luck plays at least as big a part as skill when deciding when and where to invest. Even so, when I look at the UK’s FTSE 100 index today, I can’t help but see deep value hiding away in cheap UK shares.

The Footsie dodges the global meltdown

Since the end of 2021, the FTSE 100 has lost less than 4.6% of its value. Adding in at least 3% for cash dividends already paid out in 2022 takes the index’s return closer to zero. That may not sound very attractive, but it’s a completely different story across the Atlantic.

In the US, the S&P 500 index has slumped by 18.2% this calendar year. Meanwhile, the tech-heavy Nasdaq Composite index has crashed by over 29% in 2022. And while other major stock markets have followed US shares down, the London market has been a relatively calm port in this global storm.

Barclays shares take a beating

Earlier this year, my wife and I both bought shares in big UK bank Barclays (LSE: BARC). To us, stock in the ‘Blue Eagle’ bank looked undervalued then — and may be even cheaper right now.

At its 52-week high, Barclays stock peaked at 219.6p on 14 January. Alas, global stock markets imploded after Russia invaded Ukraine on 24 February. At its 2022 low, this FTSE 100 share crashed to just 132.06p on 12 October. On Friday, it closed at 146.44p, down more than a quarter (-26.5%) over the past 12 months. The stock has also shed almost a fifth (-19.9%) of its value over five years. Ouch.

A dirt-cheap share?

Currently, Barclays has a market value of £23.8bn — a mere fraction of its pre-2008 highs. In my view, this price collapse has pushed this Footsie share deep into the bargain bin. Today, this popular stock trades on a lowly price-to-earnings ratio of 4.9, for an earnings yield of 20.4%. That’s one of the highest earnings yields on the entire London market.

In addition, Barclays shares offer an enticing dividend yield of 4.3% a year, a little above the FTSE 100’s. Impressively, this cash yield is covered a hefty 4.8 times by earnings, which suggests that it’s rock-solid and also has plenty of room for growth.

Bad times ahead?

But dark clouds have gathered on the horizon for Barclays and other big-cap firms. A toxic combination of soaring inflation, sky-high energy and fuel bills, rising interest rates and collapsing consumer confidence indicate a UK recession may be inevitable. But Barclays’ balance sheet is stronger than it’s ever been, with billions of pounds of spare capital to absorb future bad debts and loan losses.

In summary, 2022-23 is set to be a tough time for UK businesses, both big and small. Yet to me, this stock offers outstanding value to a patient, long-term investor like me. And if Barclays stock slides again, I may even buy more shares!

More reading

Cliffdarcy has an economic interest in Barclays shares. The Motley Fool UK has recommended Barclays. 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.

As an older chap, my family portfolio is fairly conservative. Also, as a veteran value investor, I tend to buy shares for two main reasons. First, my wife and I like to buy into decent companies at attractive prices. Second, we buy many stocks for their above-average dividend yields. And that’s exactly why we bought these two FTSE 250 shares in the summer.

Our worst FTSE 250 buy in 2022

In late June, my wife bought into Royal Mail Group, which changed its name to International Distributions Services (LSE: IDS) earlier this month. Unfortunately, this FTSE 250 share has crashed hard since we bought it.

At their 52-week high, shares in the UK’s universal postal provider peaked at 531.4p. After they fell steeply, we bought in at 272.8p. Alas, IDS stock continued to plunge, hitting a 52-week low of 173.65p on 14 October. On Friday, this widely held share closed at 193.8p, valuing the group at £1.9bn.

Although IDS is having a tough time with UK postal strikes, it owns a highly profitable international delivery operation. To me, this business — General Logistics Systems (GLS) — will be the engine room for the company’s future growth.

For the record, this popular stock has lost more than half its value (-53.6%) over the past 12 months. As a result, it trades on a mere 3.3 times trailing earnings, for a whopping earnings yield of 30.5%. However, IDS is set to lose hundreds of millions of pounds due to strike action, so these figures are sure to worsen.

Even so, IDS shares offer a dividend yield of 10.3% a year, covered three times by earnings. Given this strong cash coverage, I expect this firm to maintain this payment for the foreseeable future. To sum up, it’s been a rotten year for ex-Royal Mail shareholders — including my family. But any kind of positive turnaround at Royal Mail could send this stock soaring once more. Meanwhile, we will keep collected our IDS dividends to spend or buy more shares!

ITV: I’m thinking value

The second FTSE 250 share we bought this summer was broadcaster and media provider ITV (LSE: ITV). Again, my wife bought this stock because it was lowly rated and offered a market-beating dividend yield. However, since buying at 68.4p in late June, ITV shares have been a rocky ride.

At its 52-week high on 12 November 2021, ITV stock briefly touched 127.19p. But it then plunged, slumping to its 52-week low of 53.97p on 29 September. On Friday, it closed at 66.82p after rebounding almost a quarter (+23.8%) from this bottom.

Despite this rollercoaster ride, my views on ITV as a classic value share have not changed. The shares are down 35.9% over the past 12 months, driving down the group’s value to £2.8bn. Meanwhile, this company’s price-to-earnings ratio has dived to 5.9, equating to an earnings yield of 16.8%.

At the current price, ITV stock offers a bumper dividend yield of 7.5% a year, covered 2.3 times by earnings. For me, if this isn’t deep value, then I don’t know what is. And despite worries about a UK recession, soaring inflation, sky-high energy bills and collapsing consumer confidence, I think ITV has a bright future. Indeed, if its shares sink again, we may buy even more.

More reading

Cliffdarcy has an economic interest in ITV and International Distributions Services shares. The Motley Fool UK has recommended ITV. 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 beli22eve that considering a diverse range of insights makes us better investors.

Today (Thursday) has been a great day for shareholders in energy giant Shell (LSE: SHEL). As I write, the Shell share price stands at 2,436p, up 136.5p (5.9%) since Wednesday’s close. This followed an outstanding set of results from the oil & gas supermajor. So should I buy BP (LSE: BP) shares before the UK’s other energy Goliath reports its next set of results?

Shell’s gushing profits

At the current share price, Shell is valued at £171.2bn — a far cry from the levels it crashed to during 2020’s Covid-19 crisis. Indeed, almost exactly two years ago (on 29 October 2020), I said Shell shares were an unbelievable bargain. Back then, they traded at 866.4p, because Shell was going through hell. Had I bought at this low, low price, I’d have almost tripled my money by now. Wow.

In its latest results, Shell unveiled a third-quarter profit of $9.5bn (£8.2bn) — double that for the same period of 2021. Also, the group made record profits in the first half of 2022, thanks to gushing oil prices. As well as sending Shell stock higher, this news lifted BP shares to 482.25p, up 16.25p (3.5%) since Wednesday.

I’m expecting big profits from BP

Shell rewarded shareholders with a new $4bn share-buyback programme, as well as a 15% hike in its quarterly dividend. Yet British politicians were shocked to learn that the group had paid no UK windfall tax, thanks to its heavy drilling costs in the North Sea.

Turning to BP, the group announces its third-quarter 2022 results on Tuesday, 1 November. With Shell leading the way, will BP’s results and share price follow a similar trajectory?

With the price of a barrel of Brent crude trading close to $95, I’m expecting BP to have made money hand over fist in its latest quarter. What’s more, the company’s cash flow should be huge, despite a major outage at its US refinery in Whiting, Indiana.

BP shares have already soared in 2022

Then again, the BP share price has already gushed higher in 2021-22. Here’s how it has performed over six different timescales:

As I said, BP shares have had a good run, jumping almost a quarter in the past six months and zooming up almost by almost half this calendar year. This makes BP shares (and Shell stock) among the FTSE 100‘s best performers in 2022. Today, BP has a market value of £87.3bn — still a somewhat modest valuation when set against Shell’s vast capitalisation.

I’ll wait a while to buy BP shares

Earlier today, the BP share price hit a 52-week high of 483.15p, before easing back slightly. This has reduced the group’s dividend yield to under 3.7%, but this could rise if its next results allow. As for me, I shall hold off buying shares until I see BP’s latest financials. But I would prefer to own BP stock before this year is out!

More reading

Cliffdarcy 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.

The past 12 months have been brutal for owners of Rolls-Royce (LSE: RR) shares. Indeed, this FTSE 100 stock has been a disaster since Covid-19 sent global stock markets crashing in spring 2020. But after losing the majority of its peak valuation, could there be hidden value in Rolls-Royce stock?

The collapse of Rolls-Royce shares

Back in August 2018 — long before Covid-19 reared its ugly head — Rolls-Royce shares were flying high. On 3 August 2018, they closed a smidgen above 375p. As I write on Thursday afternoon, they stand at 75.53p. Thus, they have collapsed almost four-fifths (-79.9%) from August 2018’s high-water mark. Crikey.

Thanks to the damage wreaked by coronavirus, this popular stock has crashed hard. Here’s how it has performed over six different timescales:

Over the past half-decade, the stock of this great British engineering firm has crashed by more than three-quarters. Also, Rolls-Royce shares have lost almost two-fifths of their value in the past 12 months. Yet some analysts warn that things might get worse for the group before they get better.

Is Rolls-Royce heading for stormy weather?

Along with defence, a large slice of Rolls-Royce’s income comes from its Civil Aerospace arm. This has benefited from surging passenger miles flown as demand for foreign travel recovers. But European consumers are struggling with soaring inflation, sky-high energy and fuel bills, and rising interest rates. As consumer confidence plummets, I suspect that many millions of foreign holidays will be ditched due to the ongoing cost-of-living crisis.

Then again, innovative developments in other Rolls-Royce divisions might energise future revenues. For example, the company’s plans to build nuclear-powered small modular reactors (SMR) are gaining momentum. The group is also entering the market for hydrogen-fuelled engines, but these blue-sky projects will be years in the making.

I might have missed the boat to buy

At their 52-week low, Rolls-Royce shares plunged to an intra-day low of 64.44p on 28 September. They have since rebounded by more than 11p to their current level. This leaves me thinking that I may have missed my chance to get on board at a bargain-bin price. Then again, as a veteran value investor, I find it very difficult to put a firm price on Rolls-Royce stock.

Without any tangible profits, positive earnings, or dividends to work from, it’s very tricky to justify the company’s current market value of £6.3bn. What’s more, the firm carries over £5bn of net debt on its balance sheet — and global interest rates are taking off. Also, the company lost £1.6bn in the first half of 2022, with positive profits unlikely to arrive until well into 2023.

In short, in this increasingly turbulent global economy, Rolls-Royce shares are too risky for me, although I think they are by no means a dead duck. Hence, I’ll stick to what I know best — buying shares in quality businesses at modest prices for the long term!

More reading

Cliffdarcy 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.

Over the past month, I’ve read a slew of articles all claiming the same thing. Major newswires lined up boatloads of pundits to argue that UK shares had become ‘uninvestable’. To me, this belief is so wrong-headed that it’s completely laughable. Indeed, I’m so convinced that these experts are wrong, I’m putting my money where my mouth is by betting big on cheap UK stocks.

Who says UK shares are rubbish?

Early this month, I spotted a Bloomberg article warning that investors in UK shares and bonds had lost at least £300bn in Liz Truss’s first month as prime minister (from 5 September). Shortly before she resigned as PM, I came up with this little ditty: “Remember, remember the fifth of September. Because markets never forget.”

For the record, global financial markets have taken a big whack since mid-August. But UK shares fared worse than most for many reasons. First, our government was in perma-crisis.

Second, UK consumers are shell-shocked by soaring inflation, skyrocketing energy and fuel bills, rising interest rates and collapsing confidence. Third, tumbling UK government bond prices triggered a liquidity crisis that left pension funds reeling. Fourth, the pound had fallen steeply against other major currencies, crashing to a lifetime low against the US dollar.

Faced with such a toxic combination of events, global investors ditched UK shares, sending prices crashing. But to argue that British stocks were uninvestable after two months of turmoil was taking things too far, in my opinion. To me, this smelled like panic and, potentially, capitulation — which history shows is a great time to buy quality assets on the cheap.

The FTSE 100 looks dirt-cheap to me

Famed investor Baron Rothschild once remarked: “Buy when there’s blood in the streets, even if the blood is your own.” In other words, one of the best times to hoover up assets is when investors are in despair.

Also, it’s important to note that the blue-chip FTSE 100 index is not a proxy for the UK economy. The London Stock Exchange is home to some great global businesses with massive foreign earnings (especially in US dollars). Indeed, roughly 70% of the Footsie’s earnings come from abroad — and the weaker pound makes this income worth more to British shareholders.

And some yet financial commentators refer to the UK as an emerging or even ‘submerging’ market. What rot, nonsense and piffle. I regard UK shares as offering deep value to a patient investor such as me with a long-term view (especially if international mergers and acquisitions activity keeps up).

Right now, the FTSE 100 trades on a price-to-earnings ratio of 13.7 and a corresponding earnings yield of 7.3%. In addition, the Footsie offers a dividend yield of 4.2% a year, with this cash yield covered over 1.7 times by earnings. To me, these numbers look crazily cheap, which is why we’ve moved a big chunk of our family portfolio into UK shares. And we will buy more shares until they no longer appear cheap, unloved and unwanted by nervous investors!

More reading

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.

On both sides of the Atlantic, the corporate-reporting season is now in full swing. And from what I’ve seen so far, it’s been a great time to be an investor in oil & gas producers. Meanwhile, US mega-tech stocks have been big fallers as earnings growth disappoints. And on this side of the Pond, results from Lloyds Banking Group (LSE: LLOY) left the Lloyds share price looking sickly.

The Lloyds share price drops again

As I write early on Thursday morning, the Lloyds share price hovers around 41.89p, down 0.66p (-1.6%) since Wednesday’s close. At its morning low, the Black Horse bank’s stock dipped to an intra-day low of 40.86p, before rebounding by more than penny. At this level, the bank is valued at £28.2bn — a fraction of its pre-2008 high.

The bad news for long-suffering Lloyds shareholders is that its quarterly pre-tax profit slumped by more than a quarter (-25.7%). In the quarter ending 30 September, the bank recorded a before-tax profit of £1.5bn, versus over £2bn in Q3/21. This was well below analysts’ average forecast of £1.8bn.

So what went wrong to slash the bank’s profits? The answer is provisions for bad debts and loan losses, which soared to £668m. In Q3/21, the bank actually released £119m of previous reserves, so this amounts to a negative swing of £787m. Ouch.

But it wasn’t all bad news

Despite this setback, there was also good news buried in Lloyds’ latest numbers. For example:

• Thanks to rising interest rates, the bank’s quarterly net income leapt 13% to almost £4.6bn.
• Lloyds’ net interest margin jumped from 2.55% in Q3/21 to 2.98% in Q3/22, up 43 basis points.
• The cost-to-income ratio dropped to 47.8% from 51.8%, improving by four percentage points.
• Various measures of the bank’s balance-sheet strength also strengthened.

Alas, with our economy facing hurricane-force headwinds, being the UK’s biggest retail bank is hardly ideal. The soaring cost of living, skyrocketing energy and fuel bills, rising mortgage rates and the growing risk of a prolonged recession are battering consumer confidence.

What next for Lloyds shares?

I don’t own a crystal ball, so I can’t make accurate predictions about the future direction of the Lloyds share price. But here’s how it’s performed over six timescales:

To be frank, Lloyds shares have been a long-term lemon, losing almost two-fifths of their value in the past half-decade. But I buy into businesses based on their future and not their past. And the group’s current fundamentals look promising to me.

At the current Lloyds share price of 41.89p, this FTSE 100 stock trades on a modest price-to-earnings ratio of 6.9. This translates into an earnings yield of 14.4%, which covers the running dividend yield of 5.1% by 2.8 times. To me, this cash yield looks secure — for now, at least.

To me, these numbers indicate that Lloyds shares are cheap today, relative to the wider market. But Lloyds has been a perennial value trap, sucking in fresh investors for years, before crushing their dreams. Even so, I have no intention of selling any of the Lloyds shares in my family portfolio. In fact, if this stock gets much cheaper, I may well buy more shares!

More reading

Cliffdarcy has an economic interest in Lloyds Banking Group shares.  The Motley Fool UK has recommended Lloyds Banking Group. 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.

If I had £1 for every time someone insisted that investing in the stock market is just gambling, I’d easily have enough to take a nice foreign holiday.

I’ve been investing in stocks and shares for over 35 years, so I’ve heard this opinion more times than I can remember. Yet for many serious investors I know, the stock market has become their #1 source of wealth — right up there with buying a home.

Investing isn’t gambling

I firmly believe that investing in shares for the long term couldn’t be more different than, say, buying a lottery ticket or placing a bet on a sports team to win.

The key reason is that all gambles come with a built-in ‘negative expectation’. For example, I don’t buy National Lottery tickets and scratchcards, because only half of ticket sales is returned as prizes. In other words, the Lotto’s negative expectation is 50%. That’s a terrible gamble at awful odds.

Likewise, bookmakers calculate their odds on, say, sporting events such that they usually have a small (typically, 2% to 10%) positive return for themselves. In this scenario, perfectly balanced betting books guarantee positive returns to bookies.

To sum up, gambling usually involves betting on a single event, often with the odds heavily stacked against punters. And that’s just not how the stock market works.

The stock market isn’t a lottery

Of course, it’s possible to treat the stock market like a casino by making big, bold bets on particular outcomes. At times, I’ve done this myself, backing my hunches with large slices of my wealth — often with mixed results. These days, I’d argue that I was actually trading or speculating, but not investing.

Here’s how legendary US fund manager Peter Lynch summed up my current thinking: “A share is not a lottery ticket…it’s part-ownership of a business.” In other words, when I buy a stake in a listed company, I become one of many owners of that operation. And if the business does well and thrives, then I stand to benefit in future as a shareholder. So all I need do is find the right companies (or stock markets) to invest in, right?

We bet big on America. Now we’re betting on the UK

For decades, I used to pick and choose my own shares. But as our portfolio grew, my wife and I moved to investing in low-cost funds with broad exposure to core markets. And from 2009 to 2021, we bet heavily on the American stock market by buying US index-tracking funds. This produced life-changing returns for us, but then the US market crashed hard in 2022.

In late 2021, I repeatedly warned that — in my view — US stocks were overpriced and doomed to fall. So we stopped investing in American stocks and, instead, started to buy UK shares at low prices. And I’m very glad we did, because the US stock market is down heavily this year, while the UK’s FTSE 100 index has held up rather well in this global turmoil.

Finally, by investing regularly, we smooth out the stock market’s inevitable ups and downs. Also, we aim to invest for the long term (say, 10+ years from now). And this ‘time in the market’ turns investing into the best positive-expectation ‘bet’ that I’ve ever found!

More reading

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.

HSBC Holdings (LSE: HSBA) is the largest UK bank listed on the London market. However, this banking behemoth has very little exposure to the ailing British economy. As a result, the HSBC share price has held up much better in 2022 than other bank stocks. However, the FTSE 100 stock took a knock on Tuesday, following the release of the bank’s latest quarterly results.

The HSBC share price’s ups and downs

As I write (late on Tuesday afternoon), the HSBC share price stands at 443.2p, down 31.9p (-6.7%) since Monday’s close. To be honest, this share slide surprised me somewhat, because the mega-bank’s latest numbers looked pretty positive to me. For the record, here’s how HSBC shares have performed over six other periods:

Although HSBC shares have held up fairly well over the past year, they have lost over two-fifths of their value over the past five years. Ouch. (All these returns exclude cash dividends, which would increase these returns by a few percentage points each year.)

That said, the HSBC share price is in a bear market of its own, having fallen by more than a fifth (-21.9%) from its 52-week peak of 567.2p. It hit this high on 11 February, less than two weeks before Russia invaded Ukraine and sent global stock markets crashing.

Higher rates mean higher profits

In its latest financials, HSBC unveiled a quarterly profit before tax of $1.7bn, nearly $1bn below the prior-year quarter’s figure of $2.6bn. But after various adjustments, the bank reckons its underlying after-tax profit was a healthy $6.5bn, up $1bn year on year.

One thing that directly boosted the bank’s profitability was higher interest rates. These widen banks’ revenues, earnings, and net interest margins (NIMs). Higher rates are something bank shareholders (but not borrowers) should welcome. Indeed, HSBC’s adjusted quarterly global revenue leapt by 28% to $14.3bn, while its NIM rose from 1.19% to 1.57%.

I like the look of HSBC’s dividends

At the current share price of 443.2p, HSBC shares look undervalued to me. Despite its focus on the tiger economies of the Hong Kong and China, HSBC stock trades on a modest price-to-earnings ratio of 7.4. This translates into an earnings yield of 13.6%, while the bank’s dividend yield is a tidy 4.9% a year. Helpfully, this cash yield is covered 2.8 times by earnings, which suggests to me that it is solid and well-underpinned.

However, HSBC’s hefty exposure to China and its authoritarian government is a big political risk to me. Likewise, with the Chinese property market in crisis, HSBC could lose big-time if homeowners default on their mortgages. But I believe that the bank is big, broad, and strong enough to survive the China’s downturn.

I don’t own HSBC at present, but I’d happily buy the shares at current prices. However, as I already have hefty exposure to UK banks, I feel it would be unwise to add to this sector position. Hence, I won’t be buying this cheap stock for my portfolio just yet — although I might be tempted if HSBC’s price declines continue!

More reading

Cliffdarcy has no position in any of the shares mentioned. The Motley Fool UK has recommended HSBC Holdings. 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.