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A bullish stock market makes it more difficult to find stocks to buy. Stocks that were trading at prices not too long ago have started to lose more than before.
Investors struggling for ideas should not panic though. Charlie Munger – Former husband of Warren Buffett Berkshire Hathaway it has some advice that I think is worth paying attention to.
Finding stocks to buy
Bunzl's (LSE:BNZL) is a good example of the kind of thing that has been going on with the stock market lately. In early May, the stock was trading at a price-to-earnings ratio (P/E) of 18.5.
That's unusually low for this business, but investors feel much better about the company than they did a few months ago. It returns to a P/E multiple of around 25 as a result.
Bunzl P/E ratio 2014-24
Created in TradingView
Two things have happened since July. Another version of the company issued a trading update that included an expansion of ratings, a share buyback plan, and a 10% increase in profits.
Another is that interest rates in the UK have started to fall. This has given rise to share prices in general, including Bunzl.
I'm not sure this is a good thing for a basic business. Bunzl's focus on continuing to make acquisitions for growth and low interest rates could make this more expensive.
All of this is to say that I don't think the stock has the same potential right now. And that hurts, because it means I have to look elsewhere to buy stocks.
Opportunities
As Munger points out, good investment opportunities are not easy to come by. in Daily Journal At the 2019 Annual Meeting, Munger said: “The trick to the game is to have a few moments where you know something is better than average and only invest when you have that extra knowledge. And then if you get just a few chances, that's enough.“
Munger's point is that the stock market is not usually full of shares in good businesses that trade at bargain prices. And that's okay – getting a few in an investment period might be enough.
So investors should not worry if there is nothing to shout at the moment. As long as enough good opportunities arise in the end, good results can happen.
Importantly, Munger also said that investors should recognize good opportunities when they arise. Since they don't come often, being able to take advantage is important.
That means always looking for outstanding companies with good business models and long-lasting competitive advantages. Then it's a question of waiting for the right prices.
What to do?
There is an obvious question of what to do now. Since interest rates are falling, I'd rather own dividends – even if there's nothing in particular that stands out – than hoard money.
Another possibility is to invest in a fund that tracks an index such as FTSE 100 or i S&P 500. That will allow me to participate in the rising stock market without having to find every single stock to buy.
In the long run, I prefer to look at taking advantage of certain opportunities. But if they are hard to find, a separate bag can be a good alternative.
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