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The FTSE 100 looks scary. Well, it does if you’re worried about falling share prices. Since peaking above 8,000, the index has lost 500 points.
Remember that billionaire investor Warren Buffett‘s first rule of investing is “Never lose money.” And he thinks it’s so important, his second rule is “Never forget rule 1.“
It’s easier to say than do, though, isn’t it? Especially when share prices are volatile.
In fact, it’s a near impossible rule to follow literally. We have pretty much zero chance of never seeing our share prices fall.
Value vs price
But the value of our investments is what counts, not the price. And it’s vital that we don’t confuse the two.
Suppose I buy a share today for £10 that I think is worth £15, and tomorrow it falls to £8. Have I really lost money?
No, I’ll only lose money if I sell something that I value at £15 for £8. And why would I do that?
So, a key rule for times of volatile share prices: don’t sell just because a price has dropped.
Also, don’t buy just because a price has risen. But time and again, investors do exactly that.
There’s an old saying that we should “buy low and sell high.” I’m all for that. But it’s uncanny how many manage to do the exact opposite, time and time again.
Don’t sell just because a price has dropped.
Buy low
A few weeks ago, investors were buying Barclays shares for 199p. Now they’re selling for 135p. Where’s the sense in that?
Now, if something materially goes wrong at Barclays and you think the long-term share value is now lower than today’s price, then sure, that could be the right thing to do.
But I don’t see any real threat to its long-term potential here. In fact, with the shares now on a price-to-earnings (P/E) ratio of under five, I think they’re a steal.
Reduce costs
On top of that, investors who are quick to sell whenever there’s a scare in the air tend to end up paying more in trading costs.
I pay £12.50 per trade, for example. So if I buy, and then sell, some shares for £1,000, I’m £30 down right away, including £5 stamp duty. That means I’ve got to make 3% just to break even.
If I trade like that once a month, I’ll wipe out £360 of my £1,000 in a year. That’s even before I have any chance with my shares. And the FTSE 100 does not gain 36% per year.
Don’t trade
At scary times, investors tend to trade more often. Never mind just one trade per month, which is already scary, some do it multiple times every day.
So what’s the investor’s biggest enemy? I’d say there are two — short-term focus, and emotion. They’re two sides of the same thing, really.
For me, the way to win rather than lose on the FTSE 100 is twofold. Think about valuation, not prices. And invest with a horizon of at least 10 years.
Oh, and when shares are cheap, buy more. So that’s threefold.
