Stock Market

Here’s how I try to find brilliant shares for my SIPP

Bus waiting in front of the London Stock Exchange on a sunny day.

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Buying shares today for my SIPP could hopefully help me retire more comfortably in future.

But with so many shares to choose from – and a long-term outlook for my SIPP –  how can I try to find what I hope will be star performers? Here’s how!

Long-term investing

The starting point is thinking about timeframes.

I do not expect to be drawing funds from my SIPP for decades yet. That means that, from an investing perspective, I have time on my side.

In the stock market, having time on your side can be a brilliant advantage – depending on what you do with it.

If I buy shares in businesses with great commercial models and opportunities for growth, over time I could potentially see their value soar.

That depends on what I pay for them in the first place, so I always consider valuation as well as the underlying attractiveness of the business model.

But if I buy shares in companies built on shaky foundations, over the long term I may regret it no matter how fashionable they are right now.

Step by step

So, my starting point is to try and establish what industries I think will likely benefit from high long-term demand.

Next, I narrow my list to those I feel I understand. I do not need to be an expert by any means, but at least I ought to have enough comprehension of a particular business area to be able to assess a company’s performance.

Like Warren Buffett, I aim to stay firmly inside my circle of competence as an investor.

The next step in my search for shares to buy and hold in my SIPP is to identify individual companies that I think have real potential. So I am looking for one or more competitive advantages I expect to endure.

My final step before buying (or not) is to consider valuation. Even a great business in an industry with high demand can be a terrible investment, if I pay too much for its shares.

I’d gladly own this share in my SIPP!

That all sounds fairly straightforward in theory. In practice, what might it mean?

As an example, consider M&G (LSE: MNG).

Its business is asset management. Will demand for that likely hold up well in decades to come? I think so, although perhaps a shift from active to passive management could change the nature of that demand.

That might not be bad for M&G, though, as it has a strong brand and reputation for asset management that help to set it apart from rivals. I think it can adapt as the market does.

Valuing financial services firms can be difficult, as their reported earnings often include shifts in asset values that do not necessarily reflect the underlying health of the business. Indeed, last year, M&G reported an accounting loss of £1.6bn.

But it has been a consistently strong performer when it comes to cash generation. It has a dividend yield of 8.5%.

If I had spare cash available in my SIPP to invest, I would be happy to buy M&G shares.

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