The stock market has been falling this week in response to the UK government’s latest economic plan. Widespread international criticism has been making investors nervous.
On Friday, however, the FTSE 100 and the FTSE 250 both bounced back a bit as the pound regained some of its lost strength against the dollar. So has the UK market turned the corner?
Economic policy
In order to form a view on whether the stock market has bottomed out, it’s important to understand why it’s been falling. So let’s look at the latest mini-budget from the UK.
The Prime Minister has promised to keep people’s energy bills down to £2,500 on average. That’s set to cost the UK around £60bn over the next six months.
The plan is to fund this by borrowing the money and then repaying the debt by growing the economy. The most recent announcement detailed the tax cuts that are supposed to facilitate this.
Both the International Monetary Fund and the Bank of England have spoken out against the plan, claiming that it’s risky. Whether or not they’re correct, UK share prices have been falling.
If the plan succeeds, then UK businesses could grow their earnings faster than expected. This would push share prices higher.
On the other hand, if it fails, then the UK could face higher inflation and interest rates rising faster than expected. That would likely cause share prices to fall.
Either way, I think that this will take time to play out. As an investor, I’m formulating a plan for what to do with the stock market at its current levels.
Stock market opportunities
I’m taking the Warren Buffett approach to the UK stock market. This allows me to deal with uncertainty about where the stock market might go next.
Buffett’s approach to investing is to focus on owning businesses, rather than stocks. That means concentrating on what the underlying asset will produce, not on what the price of the stock will be.
According to the Berkshire Hathaway CEO, his approach to investing involves making predictions about what businesses will do, not about what stocks will do. This is important.
By looking at the business, rather than the stock, for an investment return, I don’t need to worry about what the share price might be in future. I just need to worry about what it is right now.
Comparing the company’s future earnings with the price of its shares now allows me to judge whether or not a stock is cheap. And this doesn’t depend on what the stock market does next.
Taking this approach also provides me with another tool for surviving a volatile market. It allows me to take a long-term approach to my investing.
Investing in the style of Buffett involves looking for a return from the earnings that a company generates. But those earnings will take time to come through.
I therefore don’t have to worry about where the stock market goes next. If I don’t plan to sell my shares soon, then it doesn’t matter what anyone else is willing to pay me for them.
The UK stock market can go up, down, or sideways and I think it’s especially difficult to predict at the moment. I’m focusing on investing like the Oracle of Omaha to see me through.
