Yahoo Finance Finding shares to buy for a good night’s sleep!
I once owned shares in mattress maker Tempur Sealy. The company may have made good mattresses for a relaxing slumber. But was it the share to buy for a good night’s sleep as an investor?
The question is more serious than it sounds.
A lot of people lose sleep over their investments. It does not have to be that way.
As billionaire Warren Buffett says, “when forced to choose, I will not trade even a night’s sleep for the chance of extra profits”.
Why shares can lead to sleepless nights
There are a few reasons why shares might keep someone up at night.
Sometimes a share is heading ever lower and it looks like it might end up going to zero if things do not get better.
Taking a big loss can be psychologically unsettling, but financially still not as bad as losing one’s entire investment.
Indeed, at the moment I am wondering whether my Superdry shares will recover or whether I ought to sell them now for pennies while I can.
Another concern can be that a company will need to raise more cash and so decide to issue new shares. Sometimes buying them is throwing good money after bad (if one even has spare money to invest at the time of such a rights issue).
But not investing reduces one’s stake in the company. Even FTSE 100 companies like Ocado have repeatedly tapped shareholders for more cash.
Dividend tap suddenly runs dry
Another concern that could keep one awake is dividend cancellation.
If an investor has a big stake in a company with a juicy dividend that suddenly cancels the payout, it can leave an unwelcome hole in personal finances.
Direct Line (LSE: DLG) did that just last year.
Even worse, such a surprise cut can often lead to the share price falling (the Direct Line share price fell 18% last year).
So selling after a dividend cut might lock in a paper loss on the shares’ worth. But holding in the hope of price recovery can tie up funds for years or decades, potentially earning zero dividend income along the way.
Figuring out what to do
How could I try to minimise the risk of trading a good night’s sleep for profits, as Buffett says?
One simple move is finding a diverse range of shares to buy.
Spreading the risk means that any one share badly underperforming my expectations will have a limited impact on my overall portfolio performance.
I think looking out for warning signs can help too, whether when finding new shares to buy or revisiting the investment case for an existing shareholding.
When I looked at Direct Line’s high yield in 2022 and then watched it get higher, reaching the mid teens, I wondered what was going on.
Was this an incredible high yield bargain, benefiting from a large customer base and iconic brand? Or was the yield a warning bell that other investors feared exactly what ended up happening – a dividend cancellation?
Simply by diversifying my portfolio adequately, ruthlessly focusing on high quality at an attractive price when finding shares to buy, and listening out for warning bells about an investment case, I think I can build a portfolio that lets me sleep soundly at night.
The post Finding shares to buy for a good night’s sleep! appeared first on The Motley Fool UK.
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C Ruane has positions in Superdry Plc. The Motley Fool UK has recommended Ocado Group Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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