It has been a busy week in the stock market. Many key global indices saw big falls as the week started though, since then, most have recovered.
If I had a spare £800, here is why I would happily put it into blue-chip shares today, regardless of the potential for market turmoil (indeed, I have been buying shares this week!)
Separating price and value
Taking a step back, what happens when there is a fall in the stock market? Collectively, share prices fall. Some may rise, while others move down but, overall there is a decline.
What does this reflect? Sometimes it is caused by a reduction in the real value of a company. For example, some bad economic news may mean that a business is likely to earn less in future than was previously the case – and so is worth less itself.
But in some cases, a share price moves down (or up) in a way that does not necessarily connect to its business prospects. That could offer me the prospect to buy into a high-quality business for less than I think it is worth.
Putting theory into action
As an example, consider a share I bought during Monday’s sharp market downturn, namely JD Sports (LSE: JD).
The JD Sports share price has certainly moved around over the past. Indeed, it is 22% lower now than at the start of the year.
Part of that is down to what investors call “fundamentals” (as opposed to “sentiment”). The business issued a profit warning in January and subsequent announcements of weak trading from companies such as Nike have fuelled concerns that a tightening economy could squeeze spending on showy sportswear.
Set against that though, I see a lot to like about JD. Demand for its product has been resilient. It has a worldwide presence, economies of scale, a large customer base and a carefully crafted marketing message that has worked well for years.
Its current price-to-earnings ratio of 10 looks cheap to me. I recognise that earnings could fall, due to weaker consumer spending or the cost of JD’s ambitious store-opening programme. Over time though, I believe the JD Sports share price ought to be higher than it is now.
Building wealth over the long term
There is a bigger lesson for me in JD’s share price moves. The stock market overall can suddenly move down just as sometimes it can quickly shoot up.
But I am not buying the market. I am investing in individual shares. So I want to look for specific examples where a company I think has solid long-term commercial prospects trades for markedly less than I think it is worth.
I could get that judgement wrong, of course, which is why I always keep my portfolio diversified. £800 is enough for me to buy into several different blue-chip companies at what I think are cheap valuations, as I did this week in the case of JD Sports.
Hopefully, doing that can help me build wealth over time. If I see what I think are bargains today, why wait?
The post Here’s why I’d put £800 into the stock market now to start building wealth appeared first on The Motley Fool UK.
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C Ruane has positions in JD Sports Fashion. The Motley Fool UK has recommended Nike. 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.
