Image source: Getty Images
Over the summer, the FTSE 100 index of leading British shares hit an all-time high. It has since fallen back somewhat, but is still only a few percentage points below that record high.
Yet the British economy does not look in its rudest health. From weak growth rates to risks such as inflation and geopolitics, there are reasons to be fairly modest when setting expectations about future performance.
So might that mean that we could see a stock market crash? And how can I best manage my portfolio in this environment, given the disparity between growth in the economy and growth in the stock market?
The stock market has an interpretative layer
In reality, there is a connection between the economy and the stock market. But it can be a loose one – and operates on its own timeline. This helps explain why, sometimes, some investors can be convinced that the stock market is overvalued (or undervalued) and become even more convinced over the years, but still lose money.
As John Maynard Keynes famously put it: “Markets can remain irrational longer than you can remain solvent”.
That is because the market has what we might call an interpretative layer – lots of investors with their own interpretation of whether it is cheap or expensive and investing accordingly.
Over the long run, I think the market tends towards a somewhat accurate valuation. In any given moment though, it can be quite far from that, depending on what investors do.
As billionaire investor Warren Buffett’s teacher Ben Graham put it: “In the short run, the market is a voting machine but in the long run, it is a weighing machine”.
At some point, if the economy remains lacklustre, I think the stock market could fall to reflect that. When that may happen though, is anyone’s guess.
Taking action in an uncertain environment
What then is an investor to do? My own approach is to do what I always do: not try to time the market, or guess when the next crash may be.
I do aim to be prepared for it whenever it comes, by maintaining a shopping list of high-quality shares I would like to own if I could buy them at what I see as an attractive price.
Also, rather than fixating on the stock market overall, I continue to look for individual shares I think seem like good value relative to their long-term business prospects.
I think this is a real bargain!
For example, I recently increased my shareholding in Trainline (LSE: TRN) on multiple occasions. It currently sells for 10 times earnings. The share price has crashed 25% in less than a month and has fallen 48% over the past five years.
The recent fall was precipitated by a regulatory inquiry into how the website displays charges. From my experience using it though, I think that is a small risk to the company. I reckon charges are usually clearly displayed.
Another risk is the government’s plan to create a rival to Trainline. Given the firm’s decades long headstart though, I also see that risk as overblown.
The company is profitable, has extensive European growth prospects and looks very attractively valued to me right now.
What growth stock do we like better than Trainline Plc right now?
One of our Share Advisor analysts has just released a brand new stock report that we think is a must-read for any investor looking to try and generate potential growth.
And the best bit is that you can see if for yourself, right now, absolutely free of charge!
No jargon. No hard sell. Just a clear look at a growth share idea we think is worth your time.
Christopher Ruane owns shares in Trainline
Image source: Getty Images
Over the summer, the FTSE 100 index of leading British shares hit an all-time high. It has since fallen back somewhat, but is still only a few percentage points below that record high.
Yet the British economy does not look in its rudest health. From weak growth rates to risks such as inflation and geopolitics, there are reasons to be fairly modest when setting expectations about future performance.
So might that mean that we could see a stock market crash? And how can I best manage my portfolio in this environment, given the disparity between growth in the economy and growth in the stock market?
The stock market has an interpretative layer
In reality, there is a connection between the economy and the stock market. But it can be a loose one – and operates on its own timeline. This helps explain why, sometimes, some investors can be convinced that the stock market is overvalued (or undervalued) and become even more convinced over the years, but still lose money.
As John Maynard Keynes famously put it: “Markets can remain irrational longer than you can remain solvent”.
That is because the market has what we might call an interpretative layer – lots of investors with their own interpretation of whether it is cheap or expensive and investing accordingly.
Over the long run, I think the market tends towards a somewhat accurate valuation. In any given moment though, it can be quite far from that, depending on what investors do.
As billionaire investor Warren Buffett’s teacher Ben Graham put it: “In the short run, the market is a voting machine but in the long run, it is a weighing machine”.
At some point, if the economy remains lacklustre, I think the stock market could fall to reflect that. When that may happen though, is anyone’s guess.
Taking action in an uncertain environment
What then is an investor to do? My own approach is to do what I always do: not try to time the market, or guess when the next crash may be.
I do aim to be prepared for it whenever it comes, by maintaining a shopping list of high-quality shares I would like to own if I could buy them at what I see as an attractive price.
Also, rather than fixating on the stock market overall, I continue to look for individual shares I think seem like good value relative to their long-term business prospects.
I think this is a real bargain!
For example, I recently increased my shareholding in Trainline (LSE: TRN) on multiple occasions. It currently sells for 10 times earnings. The share price has crashed 25% in less than a month and has fallen 48% over the past five years.
The recent fall was precipitated by a regulatory inquiry into how the website displays charges. From my experience using it though, I think that is a small risk to the company. I reckon charges are usually clearly displayed.
Another risk is the government’s plan to create a rival to Trainline. Given the firm’s decades long headstart though, I also see that risk as overblown.
The company is profitable, has extensive European growth prospects and looks very attractively valued to me right now.
What growth stock do we like better than Trainline Plc right now?
One of our Share Advisor analysts has just released a brand new stock report that we think is a must-read for any investor looking to try and generate potential growth.
And the best bit is that you can see if for yourself, right now, absolutely free of charge!
No jargon. No hard sell. Just a clear look at a growth share idea we think is worth your time.
Christopher Ruane owns shares in Trainline
