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The economy doesn’t seem to be doing well. Inflation is very high. A recession is expected. Even though, FTSE 100 The leading stock index has moved up 5% in the last year. Does that mean this is a frothy stock market that is out of touch with economic reality? Or could a buoyant market still offer opportunities?
In other words, if I wanted to start investing, would I jump in today – or wait in the hope that the stock price would drop?
Market time challenge
The easy answer is that no one knows what will happen next in the stock market. Many investors have very strong opinions. But how things will actually turn out is unknown.
That makes it difficult to time the market. It is always possible that it could crash unexpectedly. Similarly, the market could continue to rally. No one knows.
But if the next market move is unclear, how can I decide if now is the right time to start investing?
One way is to switch from a high-level view to a more detailed view at the individual level. As the old saying goes, this is the stock market, not the stock market. In other words, the FTSE 100 and indeed other stock indices reflect changes in the value of a basket of stocks. A sports team can perform poorly even if some players play brilliantly. It’s the same in the city. Whatever happens next to the stock market as a whole, some individual stocks may perform very well in the years to come.
The challenge is to find them!
Find stocks to buy
So, in principle I think now is a good time to start investing – depending on what stocks I buy. How will I choose them?
I focus on a few things when buying stocks. The first factor has nothing to do with the stock market at all. It is purely about a certain quality of business. Can the company make a profit in the future? To assess the possibility, I will look at the business model. If it has a competitive point of difference in a market that I think will see continued customer demand, it might turn that into an advantage.
But the second thing I look at when looking for stocks to buy for my portfolio definitely involves the stock market. If I think a company has strong prospects, can its current share price still give me value?
Ignoring the stock market noise
If a stock offers me value, I ignore the noise of the broader stock market and consider buying it for my portfolio.
For example, polymer manufacturers Victrex now more than 30% cheaper than last year. There are risks to the company’s profitability, such as rising energy bills. But I think its proprietary technology gives it a competitive advantage, while its current stock price looks attractive to me from a valuation perspective. I follow the same principles when buying individual stocks, no matter what happens in the broader stock market. That’s why I think it’s always a good time to start investing – as long as one focuses on quality businesses that sell for attractive valuations.