What shares to buy now? It’s quite a hard question given that the Footsie has recovered many of its losses. But the UK’s economy is in a terrible condition right now. Here is how I’d try to get rich and retire early.
Sure, it really seems that the risk/reward ratio is quite horrible right now. Warren Buffett, the legendary US investor, called the GDP/stock market ratio a sound way of judging if a market’s shares are overbought. As we all know, GDP is the total value of goods and services provided in a country over a year. The stock market is the market capitalisation of all the companies listed on the stock exchange. The problem is that GDP has fallen but the Footsie has recovered most of the losses. So, what should we do?
What shares to buy now?
First, I wouldn’t invest all my savings at once. We don’t know what will happen tomorrow. As I’ve mentioned before, the macroeconomic indicators don’t paint a bright picture. There are also geopolitical risks, including Brexit, US elections, and US-China relations. But the biggest problem, in my view, is Covid-19. I recommend that you try to avoid losing the opportunity to benefit from the next stock market crash. You’ll only be able to do so if you have cash to go shopping with.
Then, remember that the largest UK companies tend to be the safest ones. Earlier on I wrote about achieving great returns by investing in smaller companies. That’s very true. It might give you an opportunity to find ‘a new Amazon’. But it’s also quite risky. What’s more, finding one requires plenty of time, effort, and luck.
Large corporations, in contrast, aren’t that tough for novice investors. They are all included in the FTSE 100 and FTSE 250 indexes. There are also ways of excluding ‘bad’ companies from these lists straight away.
Avoiding ‘bad’ companies
My number one method is checking a firm’s credit rating. You don’t even have to bother about a stock’s volatility! A low credit rating automatically means that it is volatile and risky. So, I’d suggest only looking for companies with a rating in the A range. That is, it should be ‘investment grade’.
Perfect. What’s next? I’d exclude all the companies with a price-to-earnings ratio (P/E) above 20. A ratio above that is typical of high tech. But it normally suggests that a company is somewhat overvalued.
This process will likely result in a handful of large, well-established companies. Some of them are in battered sectors like oil and finance.
Focus on the largest corporations. I’d also study their profitability history. They should also ideally pay dividends or at least have a long history of paying them. Don’t exclude the banks. The Bank of England asked them to cancel dividends due to the Covid-19. But this too shall pass, I think. So, the banks will eventually resume paying dividends.
Finally, I wouldn’t put all my eggs in one basket. Instead, I’d diversify between companies and between sectors to maximise my chances of getting rich.
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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.
Motley Fool UK 2020