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It has been a busy week on the stock market. Many key global indices suffered sharp falls at the start of the week, although most have since recovered.
If I had £800 to spare, here's why I'd happily invest it in blue-chip stocks today, regardless of the potential for market turmoil (in fact, I've been buying stocks this week!):
Separating price and value
If we take a step back, what happens when there is a stock market crash? Overall, stock prices fall. Some may go up, while others may go down, but overall there is a decline.
What does this reflect? Sometimes it is due to a reduction in the real value of a company. For example, bad economic news may mean that a company is likely to earn less in the future than before, and therefore be worth less.
But in some cases, a stock's price moves down (or up) in a way that doesn't necessarily relate to its business prospects. That could offer me the chance to buy a high-quality company for less than I think it's worth.
Putting theory into action
As an example, consider a stock I bought during Monday's sharp market drop, namely: JD Sports (London: JD).
JD Sports' share price has been fluctuating recently. In fact, it is now 22% lower than at the start of the year.
Part of this is due to what investors call “Fundamentals” (unlike “feeling”). The company issued a profit warning in January and subsequent announcements of weak operations from companies such as Nike have fueled concerns that a slowing economy could reduce spending on flashy sportswear.
However, against all this, I see many positives in JD. Demand for its product has been resilient. It has a global presence, economies of scale, a large customer base and a carefully crafted marketing message that has worked well for years.
Generate long-term wealth
For me, JD's stock price moves offer a more important lesson: The broader stock market can go down suddenly, but it can also go up quickly.
But I'm not buying the market, I'm investing in individual stocks, so I want to look for specific examples where a company that I think has solid long-term business prospects is trading at a price significantly lower than I think it's worth.
Of course, I could be wrong in that judgement, and that is why I always keep my portfolio diversified. £800 is enough for me to buy shares in several different blue chip companies at what I believe to be cheap valuations, as I did this week in the case of JD Sports.
Hopefully, doing that will help me build wealth over time. If I see what I think are bargains today, why wait?
