The FTSE 100 rose 4.1% last week to hit a seven-week high, rewarding investors who kept the faith during this difficult year. At time of writing, it trades at 7,335.62 and has now climbed 7.4% since slumping to 6,826.15 on 12 October.
Coincidentally, that very day I wrote an article stating that “Today’s financial crisis is the perfect moment to buy cheap shares”. The piece began by saying: “The UK is in a pickle but that isn’t going to stop me from buying cheap shares. In fact, I see it as a good time to do so.”
The FTSE 100 is fighting back
I didn’t write that because I was anticipating a rapid FTSE 100 recovery. I simply applied The Motley Fool wisdom. The Fool has consistently argued that the best time to buy shares is when markets prices are down and top stocks are discounted.
It took me a little time to absorb that philosophy. Like many newbie investors, I found it much easier to buy shares when markets were rising and everybody was making money. Now I buy when investors are fearful and shares are cheaper.
Another advantage is that instead of fearing a FTSE 100 crash, or dip, I embrace them instead. I cast my net for good companies whose shares have been sold off but still operate solid underlying businesses. Typically, I target firms with proven revenues, loyal customers, a healthy balance sheet, strong market position and defensive ‘moat’ against competitors.
If I do my research and make the right call, I should reap the rewards when markets recover. History shows they usually do over time. Since I plan to hold my stock purchases for a minimum 10 years and, ideally, much longer, time is on my side. I can sit back, quietly reinvest my dividends, and wait for the share price to recover.
On 17 October, I used this strategy to buy housebuilder Persimmon. The stock yielded a staggering 20% at the time, and traded at around five times earnings. It’s a top dividend payer. I recognised that the UK housing market faces serious problems as interest rates climb, and could crash by 10%, or 15%. Yet I still thought this was too big a bargain to miss.
I reinvest all my dividends
Persimmon has since rebounded by 21.54%. That’s nice although, in a way, irrelevant. It could just as easily fall tomorrow. That’s fine by me. My reinvested dividends will pick up more stock when the share price is low.
I also bought Rolls-Royce on 1 November. The FTSE 100 engineer has fallen 75% in five years and looked good value to me. By showing Rolls-Royce shares some love while the market hates them, I’m hoping to benefit when sentiment shifts. The danger is that its struggles intensify but, again, I have a decade or more for my choice to pay off.
Despite the recent rally, I can see lots of bargain stocks on the FTSE 100. Tesco and Rio Tinto are both on my buy list.
I accept that the index could crash at any time. If that happens, my strategy will not change. I will keep looking for good companies trading at low valuations.
Investing is a long-term game. I reckon that buying low swings the odds of success in my favour.
