I have been thinking about the shares to buy with an eye on the coming year — and beyond.
Here are some of the principles informing my thinking.
Looking to the long term
As a long-term investor, my eye is firmly on the years ahead.
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We have seen plenty of meme stocks in recent years. But I am not interested in speculating on whether a share will be worth more next week than I pay for it today.
Instead, I am interested in businesses I think have the ingredients of long-term success.
I look for a large market, resilient demand and something that sets the company apart in that market. That could be a brand, technology or unique distribution network, for example.
There are lots of companies that could fit that description, from Unilever to National Grid.
But I am not that excited about the prospect of buying most of them in coming weeks and beyond.
Valuation and why it matters
Why not?
Basically, to build wealth as an investor over the long run, I not only need to find the right businesses. I also need to buy into them at the right price.
Some people think finding the business is the hard part. But a quick look at the portfolio of billionaire investor Warren Buffett reveals names that are not exactly under the radar, like Apple and Coca-Cola.
What can be tricky, though, is buying into brilliant companies for a lot less than they are worth. After all, millions of other investors are also scouring the market for shares to buy.
Buying at the right price matters for several reasons. One way to make money investing is for the share price to go up. But that might not happen if I pay too much for it in the first place.
Another reason valuation matters is that the dividend yield I earn from an income share is partly based on what I pay for it. If I pay twice as much for a share compared to an investor who buys it at a different time, my dividend yield will be half of theirs. That will be true for as long as we both hold the share.
Putting the principles into action
So where does that leave my investing plan for December?
An example of a great company I have not invested in because of its share price is Diageo. The business owns a host of unique brands, from Guinness to Talisker. I think long-term demand for alcohol is likely to remain high, although one risk is a larger number of young people being teetotal.
With its premium brand portfolio, Diageo has significant pricing power.
It has been on my list of shares to buy for ages – but only if I can get it at what I think is an attractive valuation.
Lately the share price has been falling. If I had spare cash to invest in December and Diageo was finally available at a price I think makes sense for me as an investor, I would happily add it to my portfolio.
