I want to buy cheap UK shares. But the FTSE 100 index is up almost 1,000 points since the end of October. Or, to put it another way, it’s risen by around 17%.
That’s quite a bold move for a period of just over one month. Yet, the index is showing no signs of stopping its ascent. And we still have the possibility of euphoria in the run-up to Christmas and year-end boosting the markets with a Santa rally. Indeed, it looks possible, and perhaps likely, the index could shoot past 7,000 before the markets close for the festive holiday.
The rally started near the time Pfizer and BioNtech revealed their new Covid-19 vaccine is more than 90% effective. And that news prompted investors to pile back into cyclical stocks and shares set to benefit from a general economic recovery. Meanwhile, the FTSE 100 has many such companies, such as Lloyds Banking Group, oil giant BP, big mining company BHP, foodservice operator Compass and hotel & restaurant owner Whitbread.
And the more good news we get regarding ways to fight the pandemic, the higher the FTSE 100 seems to go. In some ways that makes sense because the stock market tends to work as a leading indicator. So, the FTSE 100 is trying to predict what trading will be like for companies perhaps six or nine months ahead. But if the index does pass 7,000 by Christmas, will it be too late to buy cheap shares?
I don’t believe it’s ever too late to look for quality companies selling at a price that makes sense of an investment in their shares. Warren Buffett is well-known for urging us to focus on the individual shares and businesses we want to buy and to ignore what the general stock market is doing.
Meanwhile, successful stock trader Mark Minervini also focuses on individual stocks and tends to ignore the general market indices such as the FTSE 100 and the S&P 500. However, Minervini also said recently he thinks excessive optimistic sentiment could lead to a general market pull-back. And if that does happen, my guess is it could occur in the early part of 2021 when the festivities are behind us.
But far from being a cause of concern, a healthy market correction could throw up more opportunities for me to buy cheap shares. Whatever the FTSE 100 is doing, I think there are always opportunities in the stock market for investors willing to do their own research. And, for me, the best way to profit is by adopting a long-term approach to part-owning companies by holding stocks. I like to aim for holding my shares for at least five years to allow time for underlying operational progress in the business to drive my returns.
That said, I think it’s important to be unafraid of selling an investment either completely or partly. For example, I’d sell if the investment ‘story’ changes or to rebalance my portfolio if one position grows a lot. After all, one successful investor, Jim Cramer, is often urging investors to regularly take some profits. Why? Because we never truly know what will happen next.
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Kevin Godbold has no position in any share mentioned. The Motley Fool UK has recommended Compass Group and Lloyds Banking Group. 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.