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I first starting investing in 1986-87 by tentatively buying shares in large FTSE 100 companies. Being young and foolish (alas, with a small ‘f’), I made many errors and mistakes. If there was any way to lose money, I surely found it. More than 35 years later, I’m a lot older and a little wiser. Today, my strategy is to preserve my family’s assets by getting rich slowly, rather than quickly. Here are four bone-headed mistakes I’ve made in the past that I aim to avoid today.

1. Concentrating too hard when buying shares

One shrewd old sage once said, “Never risk what you can’t afford to lose”. In other words, investors should spread their money around. When buying shares, it’s very unwise to keep your nest eggs in too few baskets. This is known as concentration risk — and it can be deadly. Many years ago, one stock I heavily invested in crashed to zero, generating a 100% loss. This cost me several hundred thousand pounds. Ouch. Today, by investing across different stocks and asset classes, I’ve dramatically reduced the risk of blowing up my family portfolio.

2. Levering up when buying shares

In the past, I have employed leverage to enhance my returns when buying shares. Leverage involves using borrowed money or financial derivatives to boost gains. While leverage can greatly magnify positive returns, it does the same for losses. Thus, when I’ve been wrong while using leverage, it’s been brutal. For example, I once bought a big block of shares using a 40% deposit, while borrowing 60% from my broker on margin. When the share price plunged, I got wiped out and had to pay a margin call for tens of thousands of pounds. As a result, I have avoided using leverage for many years.

3. Catching falling knives

An old City of London maxim states, “Never catch a falling knife”. In other words, don’t rush into buying shares in a company just because they collapse one day. As often as not, there is a very good reason why individual stocks go into free fall on given days. In my experience, buying shares that plunge suddenly is very much trial and error. Sometimes it works, sometimes it doesn’t. A share price that has crashed by 80% can still fall another 80%, especially when a company is failing. Today, before I buy a nosediving stock, I make darn sure there’s still a solid business behind it.

4. Missing out on dividends

Some (but not all) UK companies pay dividends to their shareholders. These regular cash pay-outs are one reward for being part-owner of a business. Typically, these cash payments are made quarterly, half-yearly, or yearly. However, dividends are not guaranteed and, therefore, can be cut or cancelled without notice. Most London-listed companies don’t pay dividends, although most FTSE 100 firms do. Here in the UK, history shows that reinvested dividends can account for around half of the long-term returns from buying shares. Therefore, I have come to rely on dividends to provide a large slice of my future returns. These days, my family portfolio generates plenty of passive income to reinvest into more stocks — or spend, of course!

The Barclays (LSE: BARC) share price has completely recovered from the stock market crash in 2020 and is now higher than its pre-Covid price. This is not surprising, especially considering annual profits reached a record high in 2021. This indicates that there may be further to rise. On the other hand, due to the current geopolitical tensions in Eastern Europe, and the consequent risks of economic shocks, there are equally risks that must be considered.

Recent results

Barclays’ full-year 2021 results were excellent across the board. For example, profit before tax reached £8.4bn, which was almost treble the £3.1bn achieved in 2020. Such a strong performance was enabled by the bank’s diversified business model. For instance, the Corporate and Investment Bank segment saw a profit before tax of £5.8bn. This highlights how the business model extends far beyond just its lending business, a factor that differentiates it from many other banks.

The strong results have also enabled the company to adopt a generous capital returns programme. This includes a share buyback programme of £1bn and a final dividend of 4p per share. As such, at the current Barclays share price, the dividend yields around 3.7%. This is in line with other FTSE 100 stocks and is certainly a strong reason to buy the shares. The share buyback programme should also have a positive effect on the share price.

Some risks

The current geopolitical tension in Eastern Europe is likely to have some negative effects for Barclays, especially as it’s a global bank. This is a reason why the Barclays share price fell around 9% last Thursday. The recent news that many Russian banks will be excluded from Swift, which is pivotal for the smooth transaction of money worldwide, could affect Barclays indirectly.

I’m also worried that the company’s strong investment bank performance may not be repeated next year. This is because capital markets were extremely active in 2021, with many initial public offerings (IPOs). As Barclays often acts as the underwriter in these IPOs, this large amount of activity benefited it greatly. As such, if there is a lower amount of capital markets activity in 2022, which certainly seems likely, Barclays may suffer. Lower profits are the likely result.

Is there room for the Barclays share price to rise?

After the bank’s recent results, the Barclays share price currently has a price-to-earnings ratio of around 5. This indicates to me that the shares are severely undervalued, and a drop in profitability for 2022 is already factored in.

It means I am continuing to buy Barclays shares for my portfolio as I think they are keenly priced at present. The current macroeconomic environment is also far more stable than during the peak of the pandemic, and interest rate rises could aid the bank’s profitability. Therefore, I’m willing to disregard the risks and buy more Barclays shares now.

Stuart Blair owns shares in Barclays. The Motley Fool UK has recommended Barclays. 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.

Last Thursday, Russia launched its widely anticipated invasion of Ukraine. As a result, share prices around the world initially swooned. On Thursday, The FTSE 100 index tumbled by 291.17 points, shedding 3.9% of its value. At first, the S&P 500 index opened sharply down, but then a swarm of buyers raced to buy the dip. By Thursday’s close, the S&P 500 had actually gained 1.5%. Global stock markets surged again on Friday, as fears of a wider European conflict receded. For the week, the FTSE 100 was down 0.3%, while the main US market index was unchanged.

But investors are people and they still worry about the fate of Ukraine and its 44m people. This partly explains why some share prices stayed low and why the Lloyds Banking Group (LSE: LLOY) share price stumbled last week.

The Lloyds share price dives, then rebounds

On 17 January, the shares hit their 2022 high of 56p, before closing at 55.13p. On Wednesday, just before war broke out in eastern Europe, the Lloyds share price closed at 52.2p. As battle raged on Thursday, Lloyds shares hit a low of 46p, before recovering slightly to close at 46.54p. That’s a one-day plunge of more than 10%, making Lloyds one of the FTSE 100’s worst flops on Thursday. For the record, I’d have been delighted to buy at 46p-47p on Thursday, but I was unavailable to buy that day. On Friday, Lloyds shares surged with the wider market, closing at 49.68p, and up 3.14p (6.7%) in this rebound rally.

I think Lloyds is too cheap today

With the Lloyds share price closing at 49.68p on Friday, the Black Horse bank is valued at £35.3bn. For me, this is a modest price tag for a leading British retail bank with around 26m customers and 58,000 staff. Lloyds is the UK’s #1 mortgage lender, thanks to its ownership of leading brands including Lloyds Bank, Halifax, Bank of Scotland and Birmingham Midshires. It’s also a leading provider of credit to British businesses and consumers.

However, this means Lloyds is heavily exposed to both house prices and consumer credit. While property values soared in 2021, analysts expect them to rise more slowly this year. Then again, if Covid-19 recedes, rising public confidence could boost growth in consumer credit. For me, Lloyds holds a mirror up to the entire UK. If our economy does well, then Lloyds and its profitability should follow suit. However, if new, deadlier variants of coronavirus do emerge, then this could batter the group again — as happened in 2020. At its 2020 low, the Lloyds share price collapsed to 23.58p, before soaring.

Right now, I see it as an attractively priced play on a continued economic recovery from Covid-19. At the current Lloyds share price, it trades on a modest price-to-earnings ratio of 6.7 and an earnings yield of 15%. This covers the current dividend yield of 4% a year almost four times over. I regard these as undemanding fundamentals, given Lloyds’ potential as a play on continued UK economic recovery. That’s why my family portfolio will soon own Lloyds shares again — for the first time in perhaps 15 years!

Cliffdarcy has no position in any of the shares mentioned. The Motley Fool UK has recommended Lloyds Banking Group. 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.

At the end of last year, I wrote about why I thought 2022 could see high stock market volatility. At that point in time, I thought this was going to be driven mostly by Covid-19 and difficulties in coming out the other side of it. Yet after two months, the volatility has come more from central bank actions and war between Russia and Ukraine. With markets whipsawing around several percent during a day, here’s how I can protect my portfolio.

Making use of orders

On way I can benefit from high stock market volatility is by thinking ahead and placing an order to buy the stock I want at a specific price. For example, let’s consider Lloyds Banking Group shares over the past week. On Thursday, the share price fell almost 11% to drop to levels not seen since last December just above 46p. On Friday, the shares bounced back 6.8%.

In the knowledge that the market was going to be choppy, I could have placed an order to buy shares in Lloyds if it dropped below 50p. Or I could have placed it at 48p, 47p or wherever I wanted. The main point is that if I’m patient, high volatility could give me the chance to buy stocks on my watch list at a better price than currently on offer. This move might only happen in the space of a few hours, so placing an automatic order to execute on my investing platform is a smart move in my opinion.

However, I do need to be aware that there’s the risk that the market might not reach the specific level I’ve placed my order. 

Using market volatility for dividends

A second point I can make use of is buying dividend shares when the yield is attractive. The two parts that make up the dividend yield of a stock is the dividend per share and the share price. Let’s say the dividend per share has stayed the same for a while, at 5p. If the share price is 100p, then the yield is 5%.

What if I liked a specific company but really wanted a yield higher than 5%? A volatile market can give me this opportunity. From doing my homework, I can calculate that if the share price drops to 82p, then the yield will jump to 6%. With this is mind, I can keep an eye on the share price, and if a sudden slump occurs, I know exactly what I need to do.

Sticking to defensive stocks

If I want to simply to try and ride out the high stock market volatility, I can consider buying some defensive stocks. I detailed four of my current favourite defensive stocks here.

In short, consumer goods brands such as those owned by Unilever and Reckitt should be able to help me navigate stormy markets. This is because the products they sell are necessities for many people. Therefore, regardless of the situation around the world, consumers will likely keep buying them, helping to maintain revenues for the firm.

Jon Smith has no position in any share mentioned. The Motley Fool UK has recommended Lloyds Banking Group, Reckitt plc, and Unilever. 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.

In 1965 Warren Buffett took control of Berkshire Hathaway a struggling textile company based in New York. Over the next 57 years, he’s amazed us all by turning it into one of the most valuable conglomerates around. He did this with a fairly simple set of investing principles that investors the world over try to emulate. Here are a few tips I try to follow when making my own investments.

Stay within your circle of competence

The disciplines and sectors in which an investor has a great interest or understanding are referred to as a ‘circle of competence’. We can’t all be experts in everything, but if I’m passionate about a subject, I’m more likely to have an advantage when picking the firms to invest in. By contrast, how will I know which are likely to flourish if I don’t have at least a basic grasp of a specific industry?

Warren Buffett has been criticised for not investing in the internet boom, although he became an Apple investor in 2016. He’d consistently emphasised that he had little understanding of how technology businesses operate or, more significantly, how they earn money. Instead, he concentrated on companies that make things, such as Coca-Cola, or on finance, such as Bank of America…and eventually Apple. The company, of course, makes a lot of very popular physical things, as well as monetising the internet. And me? I’ve been interested in renewable energy for a long time, so that’s where I’m concentrating my efforts.

Well-known investor, Peter Lynch, reiterated a similar view. “I know restaurant managers who invest in IBM, but…why they don’t invest in restaurants. They know how the business works. They know if a restaurant is profitable and what sorts of challenges they face”.

Business fundamentals

Focusing on the fundamentals of a company’s business is another crucial aspect of Buffett’s strategy. How does it generate revenue? What’s the profit margin? Is there a lot of cash on hand, or is it heavily in debt?

Investors can find the answers via a short web search. Financial statements might be intimidating (and boring) to read, but the specifics of the firm are there for anybody to view.

Buffett has long recommended investors avoid firms with a lot of debt and instead seek a lot of cash flow.

Paying down heavy debt loads will eat into a company’s earnings. However, if it has solid cash flow and cash on hand, it can weather storms (like pandemics).

The most prized virtue? Patience

Finally, Buffett is a patient man. Waiting years and years for an investment to pay off is an example of this. It might also be a matter of waiting to invest.

With one important distinction, he once compared investing to baseball. “In investing, no one’s making you swing.” He’s the first to confess that he’s made some poor investing decisions. However, when it comes to investing my own hard-earned money, it’s always best to be careful, and to wait for the right time and the right firm before making a decision.

There’s no way to be certain about any investment, but knowing the company and the industry may provide investors with a significant advantage. Patience can aid us in waiting for the ideal moment.

If it’s worked for Warren Buffett, it may well work for me.

James Reynolds 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.

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Over the past 12 months, the Rolls-Royce (LSE: RR) share price has been on a bit of a wild ride. In fact, over the past five years, shares in the aerospace giant have been incredibly volatile.

The stock traded as high as 375p in August 2018. However, by the beginning of October 2020, it had lost more than 90% of its value. Since then, the stock has recovered, but it still trades around 70% below its five-year high. 

The Rolls-Royce share price conundrum

The thing is, Rolls’ underlying business is nowhere near as volatile as its share price. The equity volatility suggests the firm is exposed to short-term agreements, which are impossible to predict. The reality is entirely different. 

The company sells aircraft engines on multi-year service contracts and also has a contract to maintain the nuclear reactors in the Royal Navy’s submarines. 

Granted, the corporation has had to deal with some significant challenges in recent years. These continue to rumble on in the background. Disruption to the aviation business from the pandemic, and some engineering issues, have cost the company a significant amount of money. 

Until the global aviation industry has fully recovered from the disruption of the pandemic, Rolls is unlikely to return to full health. 

Still, management thinks the enterprise will generate around £750m in free cash from operations this year. This gives me a fundamental waypoint with which to value the company. 

Rolls has a market capitalisation of just under £10bn, at the time of writing. If the firm can hit its cash generation target, the stock has a free cash flow yield of 7.5%. By comparison, other businesses are trading with a free cash flow yield of around 3-4%. 

Undervalued

The Rolls-Royce share price may not warrant the same valuation, but I do not think it is unreasonable to say that the stock looks cheap compared to its peers. Even if the firm’s valuation moves to a free cash flow yield of 5-6%, the stock could rise 30-40% from current levels. 

Of course, these figures are just estimates. There is no guarantee the company’s valuation will rise to the market average. Neither is there any guarantee the enterprise will meet its free cash flow generation targets.

Nevertheless, I think these numbers clearly illustrate that the Rolls-Royce share price is worth significantly more than it is currently trading for in the market.

Based on this analysis, even though the company does face some significant challenges in the year ahead, I would be happy to buy the stock for my portfolio today as an undervalued recovery play.

I think that as the aviation industry rebounds from the pandemic, investors will return to the sector. This could drive the company’s valuation back to the market average multiple.

So while it might take a couple of years, I think the real value of the stock is significantly higher than the current price. My price target would be around 155p, an increase of 35% from current levels. 

Rupert Hargreaves 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.