Despite a 7% increase in stock prices in the past week, the immediate outlook for FTSE 100 growth is worrying. In the year to date, the index has lost 24% of its valuation. However, for a long-term investor, I believe the index could still be rewarding.
People are now looking at alternative investments, such as cryptocurrencies. Since the start of the year, the price of Bitcoin has increased by roughly 8%.
I believe that investing in Bitcoin carries too much risk for personal investors. There is no underlying intrinsic value to the cryptocurrency, which makes estimating a future price almost impossible. Consequently, buying Bitcoin feels more like gambling than investing.
Instead, I think now could be an ideal opportunity to buy stocks in quality businesses. The FTSE 100 has suffered multiple market crashes since its inception in 1984. Each time it has recovered its losses. I see no reason to believe now will be any different.
Margin of safety
In times like these, I like to read some of the things that Warren Buffett has previously said.
A wide margin of safety is one of his investing principles, which Buffet learnt from his mentor, Benjamin Graham. For Buffett to buy, he wants the business to be trading at a price below its intrinsic value. The margin of safety allows for some breathing room should circumstances change or in case of any mistakes in analysing the stock.
I would rather hunt out companies with a margin of safety than buy Bitcoin. With the market crash causing FTSE 100 stock prices to fall, now could be a great time to pick up cheap stocks with good growth prospects.
FTSE 100 growth vs. income
At the moment, I am focussing on FTSE 100 companies for their growth and recovery prospects. Although I am still reviewing historic dividend yields as part of my intrinsic value calculations, in this market I do not consider future yields to always be a reliable metric.
There are two reasons for this. Firstly, I believe it is prudent and reasonable for some companies to use cash that would otherwise pay dividends as capital to fund future growth. Warren Buffett’s Berkshire Hathaway is a good example of a company that has often used this tactic. Buffett prefers to reinvest the businesses profits and believes this provides more long-term value to shareholders.
The second reason why I have put more emphasis on growth than income in the current market is that some companies – like Greggs – have suspended or cancelled previously announced dividend payments. With the coronavirus outbreak causing uncertainty, impacting revenue and profits, I do not believe that now is necessarily the time to focus on future yields.
I would rather invest in companies that have a track record of producing serious amounts of profit with little capital outlay and almost no debt. As the market crash has caused a major slump on FTSE 100 share prices, it is now possible to find these types of companies trading at a bargain price.