With the contribution deadline for ISAs coming up next week, I have been thinking about my own share-owning strategy. This year is not the first one I have held an ISA. But if it was, I would use the vehicle to start investing in shares.
I would not simply be investing in shares I had heard something good about, or a friend had recommended however. Rather, I would hunt for cheap shares in well-established, profitable blue-chip companies.
Here is why and how I would go about it.
Dipping a toe in the water
Buying shares for the first time can be exciting. But it can also be daunting. How can one tell what shares might do well? After all, loads of other investors are trying to do the same thing. That can push prices up.
Like most activities, investing involves a learning curve. So if investing in a Stocks and Shares ISA for the first time, I would take a conservative approach, focussed more on trying to preserve my capital rather than maximise my potential rewards. I would start investing by avoiding what I saw as potentially high-risk, high-reward investment opportunities.
Finding blue-chip shares to buy
So what sorts of companies would I be interested in adding to my ISA as a new investor?
I would look for businesses with a strong position in an industry I expect to continue seeing a lot of customer demand. But rather than looking at firms that owed such a position to low prices, I usually hunt for ones that have some sort of competitive advantage that gives them pricing power.
For example, think about pharmaceutical companies such as AstraZeneca and GSK. They usually have patents on drugs that can help them make large profits over the course of time. Last year, for example, AstraZeneca generated $5.4bn from its blockbuster drug Tagrisso alone.
There are other examples of such business models among blue-chip FTSE 100 companies. Consumer goods firms such as Unilever and Reckitt have unique brands, National Grid has an unrivalled energy distribution network and Land Securities is the sole owner of some prime real estate.
Why I like cheap shares
As it happens, I do not own any of those shares right now. There are different reasons for that, but an important one is valuation.
I invest to try and make money over the long term. If I was to start investing today, my approach would be exactly the same. It can be summarised as trying to buy stakes in great companies for less than they are worth.
In fact, that is how I define “cheap shares”. For me, cheapness is not just about price. It involves buying a stake in a company at a discount to what I think it is worth.
Many other investors also want to buy into strong businesses and that can push their share prices up. But I think if I am patient, I can find cheap shares in great companies and, hopefully, build my wealth!
