As I write on Thursday morning, it looks like another down day for the UK stock market. At its morning low of 6,823.6 points, the FTSE 100 index was down almost 180 points (2.5%). Currently, it hovers around 6,855 points, down 2.1% since Wednesday’s close. Checking the Footsie’s constituents, I see only seven stocks in positive territory — and all up by 1% or less. Meanwhile, the other 94 FTSE 100 members are all in the red, with the five biggest fallers down between 5% and 8%. Furthermore, this latest slide comes on top of a similar-sized setback on Tuesday and a modest decline on Monday. So, it’s been a bad week so far for UK shareholders, right? Not exactly, because it very much depends on investors’ personal situations.
Warren Buffett loves buying burgers
After 35 years of investing in shares, the most important lesson I’ve learnt is perhaps the simplest. When, say, FTSE 100 share prices go down, should I be worried or pleased? The answer depends on whether I am a net buyer or a net seller of stocks. In 1997, billionaire investment guru Warren Buffett asked his Berkshire Hathaway investors this clever question: “If you plan to eat hamburgers throughout your life and are not a cattle producer, should you wish for higher or lower prices for beef?”
In other words, if I want to keep buying into good companies, then I ought to be delighted when share prices fall. However, what if I am a much older investor seeking to reduce risk by selling shares for safer assets? Then I should be concerned at falling prices, because I’m getting less bang for my seller’s buck. At the age of 53, I’m still at the ‘accumulation’ stage of my life. In other words, my retirement remains some way off. Thus, as I’m still earning sufficient income, I’m still happy to take ‘equity risk’ by buying cheap UK shares. And I still see some real bargains lurking in the FTSE 100 today.
‘Bottom fishing’ in the FTSE 100
Fairly often, I will go ‘bottom fishing’ in the FTSE 100, looking for shares in recent decline. But I’m not looking for bombed-out shares that have plunged in value. When bargain-hunting, I remember these wise words from Benjamin Graham, Warren Buffett’s mentor: “A stock is not just a ticker symbol or an electronic blip; it is an ownership interest in an actual business, with an underlying value that does not depend on its share price.”
Therefore, when I go looking for cheap FTSE 100 stocks, what I’m actually doing is looking for shares in good companies at fair prices. I’m not looking to catch so-called falling knives. I’m simply interested in buying into (or increasing my existing stakes in) businesses I’d be happy to own. At the same time, I hope to be, in the words of Ben Graham again, “an intelligent investor…who sells to optimists and buys from pessimists”.
To sum up, I’m not at all worried that the FTSE 100 is down nearly 4% since Friday’s close. I’m also unconcerned that the S&P 500 index has dipped by almost 3% this week. As a rational investor with a decent investment horizon, I’ll keeping buying into good businesses in market dips. Only later on, after I retire, will I use the passive income from these investments to keep me going in my old age!