The UK stock market has been choppy over the past couple of weeks. The FTSE 100 saw a drop from 7,100 points down to 6,850 points in just a few days, before rallying back sharply above the 7,000 level at the end of last week. Such short-term swings are becoming increasingly common. However, I think this gives me good opportunities to buy cheap UK shares that I can then hold for a decade. Here’s why.
What’s a cheap UK share?
I need to elaborate a little on what I mean when I speak of cheap UK shares. The simple part is UK shares. I primarily look for stocks within the FTSE 100 index, but can expand my search and include the FTSE 250 and even AIM-listed companies.
Identifying a cheap share is slightly harder. It’s subjective, as something I think looks cheap won’t be the same for someone else. Yet there are some common denominators most can agree on. For example, a price-to-earnings ratio that’s below the index or sector average. Alternatively, a share price that is at long-term low levels when using a time frame spanning several years.
Each investor will have their own specific points they look for on top of the above. The main point from this is that some UK shares look cheap to most investors, but other shares offer less of a consensus.
The long-term mindset
Once I’m happy with the cheap UK shares I’m buying, my aim is to hold them for a decade. Why? If I truly believe the stock is a good buy, then the probability of me making a profit from holding a stock should increase over time.
For example, consider Company X that I think offers me good value going forward. One week after I buy the stock, a trading update comes out that’s worse than expectations and the share price falls. If I sold now, I would make a loss. Over the course of the next few years, results improve and the valuation comes back to a fairer (higher) value. This now puts me in profit.
The point here is that short-term moves don’t always reflect the long-term trend. By having a mindset that I’m going to hold the cheap UK share for the foreseeable future, it helps me to be less stressed about swings in the short run.
Thinking about which stocks I’m happy to hold for the future also helps me make more rational decisions. If I don’t think a business will still be going strong in a decade, why should I buy it now? This particularly applies for ‘meme stocks’ and other high-risk shares that I might be tempted to buy. They could offer great short-term returns, but I need to weigh up the risk and reward by looking beyond the next few months.
With these points in mind, I can hopefully generate strong long-term gains from undervalued shares.
