Do you know why Warren Buffett is so hard to follow? It’s human emotion. He has perennially urged us to buy more shares when those we like are falling for no rational reason, and on the face of it that seems obviously right.
But it can be really hard to bring ourselves to do that when the market is doing the exact opposite, and we doubt our own analysis.
But you know what? The market, the experts, the irrational emotional contingent — they are often spectacularly wrong, and as individual investors we really can benefit from ignoring the crowds and buying what we feel is right.
Beating emotion
It can be very discouraging when shares we buy just keep on falling, as I spoke about not so long ago. But what do we do?
I’m currently in the process of reinvesting some money I have freed up from an old-style protected-benefits pension scheme (and the process was not without its trauma), and I’m putting together something like a top 10 of FTSE 100 dividend shares that I’m likely to buy.
But one key point, explained by the likes of Warren Buffett among others, is that expanding your portfolio to encompass other stocks for the sake of diversification can be a mistake. If you wouldn’t buy a stock among your top choices, should you buy it just to diversify your portfolio? I say no.
So if you have more money to invest and only have a small selection of candidates, what should you do? I say put more money into those shares you already have among your favourites, and I reckon topping up on your top few can be a much better approach than extending your portfolio to 10, 15 or more individual stocks.
Ultimately, the more you diversify the more you are likely to just match an index tracker — and just buying a tracker is a lot easier.
Money, meet mouth
Anyway, that’s why I’m planning to buy more shares in Lloyds Banking Group (LSE: LLOY) for my SIPP — I won’t do it just yet, in accordance with the Motley Fool’s policies, but probably within the next month.
Am I sure of Lloyds? No, and the depressed share price clearly means there are plenty of folks in the investing world who don’t like Lloyds. There have clearly been real fears, and Lloyds shares look to be to be priced for a lot of bad news on the horizon.
But as fellow Fool commentator Roland Head has pointed out, nothing continues to go wrong. Fears about possibly increasing bad debts have still not come to pass, and the bank’s balance sheet was easily good enough to beat the latest Bank of England stress tests.
And while the market, presumably scared away from banks in general by Brexit, shuns Lloyds, we’re looking at P/E multiples of under seven — which is only about half the FTSE 100‘s long-term average. And that’s with dividend yields of more than 6%, which would significantly beat the Footsie’s current average of 4.5% (which itself is ahead of its long-term trend).
What I’m seeing is a seriously attractive dividend from shares at a rock bottom price, but with no rational basis for their undervaluation. I intend to buy more.Â