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It has been a busy week in the financial markets, with the US S&P 500 index entering a correction. That is not as bad as a crash (a correction is a fall of 10% in short order, while a crash is double that) – but it does not bode well. Could this really be a good time for a stock market novice to start buying shares for the first time?
I think the answer may be yes – here’s why.
What happens when the market suddenly falls
A stock market correction can make headlines – but for many investors it does not matter.
There are two key reasons for that.
First is the difference between the market and a portfolio of individual shares.
Looking from afar at a forest does not typically tell you much about how individual trees in it are doing. It is the same with the market: a crashing market does not mean that all shares go down, just as when the market soars some stocks go in the other direction.
The second reason market turbulence may not matter for an individual investor is that falling prices reflect what buyers are now willing to pay. But there is (aside from certain situations, such as an agreed takeover) no obligation for a shareholder to sell. They can hang on and the price may recover (or more) in future.
Timing the market is not for beginners (if anyone)!
I do not think it is worth trying to time the market, as nobody knows what will happen next.
I can understand why some people decide not to start buying shares until they feel more confident about the direction the market might take.
But I think that misses the point. If an investor is not “buying the market”, the overall picture can be completely irrelevant.
In fact, I think the question is the same whether for a new or experienced investor, in a market that is doing well or badly: are they getting more value than they are paying for when buying individual shares?
On the hunt for value
That can be in a literal sense. For example, shares in Scottish Mortgage Investment Trust are selling at a discount of 10% or so to their net asset value.
But I am thinking in more of a conceptual, forward-looking sense.
Like Warren Buffett, I aim to buy shares that, even allowing for the cost of tying up money for years, cost significantly less today than I think they are worth when considering the underlying potential of the business concerned.
For example, one share I recently added to my portfolio is Greggs (LSE: GRG). The Greggs share price has fallen a third over the past year.
The City is nervous about risks including slowing sales growth, a weak economic outlook hurting consumer spending, and increased labour costs imposed by the Budget eating into profits.
But that means the baker’s valuation fell to a level where I decided to start buying Greggs shares for my portfolio.
After all, the market for convenient, cheap food is huge and resilient. Greggs has an extensive shop network, economies of scale, proven business model, and unique items that help set it apart from rivals.
Taking a long-term approach, the share looks undervalued to me.
