Here’s my dirty little secret about picking UK shares

At heart, I’m an investor focused on the long term. I choose stocks according to attractive fundamentals and aim to hold them with the same tenacity as someone who owns the entire business.

Such business-perspective investing is the meat and gravy of well-known investors and fund managers, such as Warren Buffett. And he learnt much from people that had gone before, such as Benjamin Graham and Philip Arthur Fisher.

The roll-call of other well-known investors who made their names focusing on business fundamentals includes Lord John Lee, Neil Woodford, Jim Slater and his successful investor-son Mark Slater.

My secret’s out

My approach to investing in UK shares and other stocks fits well into the tradition established by such eminent fundamentals-based practitioners. But I’ve got a dirty little secret — I do stock timing.

In other words, as well as aiming to identify great businesses, I aim to buy their shares at opportune moments. But, sometimes, I reckon investors pay little attention to timing. I often hear a school of thought along the lines that aiming to time the markets is a waste of energy. And worse, it could lead to missing out on gains. Time in the market, people argue, is more important than aiming to time the market.

And I agree with the overall thrust of that argument. After all, my aim is to pick good and growing businesses, then hold their shares for a long time. But I don’t just buy the stocks of great businesses and allow the passage of time to hopefully sort out my lack of attention to timing.

But neither do many other fundamental investors. One of the great devices often used by investors to time their entry into and out of stocks is valuation. Buffett, for example, looks for wonderful businesses selling at fair prices. He doesn’t look for wonderful businesses selling at any price.

And he’s well-known for selling stocks when he thinks a company’s valuation has become too high, or if a stock has risen enough to remove a valuation anomaly that he was trading. His investment in PetroChina a few years back is a good example.

Other stock-timing methods

So Buffett and other investors such as Peter Lynch tend to time their investments according to valuations. But there are other methods as well, such as watching the moves of the general market. For example, when there’s been a decent sell-off, or bear market, there’s often a better chance of finding decent value among stocks. Last year’s market crash because of the pandemic is a good example of that method of stock timing.

One of the most respected fund managers of recent times is the UK’s Anthony Bolton. He ran the Fidelity Special Situations Fund and delivered an annualised return of around 20% over 25 years. You couldn’t ask for an investor to be more based in fundamental analysis than him.

Yet a read of his book, Investing Against the Tide, revealed to me that he was a big stock timer too, using various methods. But attempting to time stocks and analysing valuations will not guarantee a successful investment outcome. However, I’m keen to have as many strings to my investment bow as possible.

Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.