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Warren Buffett has an enviable track record when it comes to investing money in cheap stocks. Yet, he’s become one of the wealthiest people in the world through using a relatively simple strategy to great effect.
At a time when the stock market crash has caused many cheap UK shares to become available, his disciplined approach and long-term view may be more relevant than ever in these unstable times.
Indeed, it could lead to impressive returns in the long run that facilitate the building of a surprisingly large retirement portfolio.
Warren Buffett’s disciplined approach to investing money
Warren Buffett uses a disciplined strategy when investing money in stocks. He seeks to buy high-quality companies when they’re trading at prices that undervalue their long-term prospects. Should no such opportunities be available, he’s content in waiting for a time when they can be purchased.
Such a situation could be present right now. The stock market crash has caused a wide range of cheap UK shares to come into existence. However, it’s important to approach their purchase with a disciplined strategy that could lead to less risk and higher long-term returns. For example, it may mean avoiding the very cheapest shares due to their weak financial positions, or lack of a competitive advantage. Similarly, it may mean waiting for more attractive prices to come along for the very best FTSE 100 and FTSE 250 shares.
By using a Buffett-style disciplined approach, it’s possible to apportion capital more effectively. It may equate to investing in the very best opportunities from across the FTSE 100 and FTSE 250 after the stock market crash.
Warren Buffett’s time horizon is also exceptionally long. It means that his portfolio has a vast amount of time to benefit from compounding. The end result has been exceptional growth in his wealth over recent decades.
Of course, holding stocks when they’re in profit can be a difficult process for any investor. There’s a temptation to sell out in favour of another investment. Similarly, holding stocks when they’re losing money is also a difficult process that can cause a significant amount of worry.
However, Warren Buffett’s long time horizon may be beneficial given current stock market conditions. There continues to be a very uncertain near-term outlook for cheap UK shares. For example, the threat of a second market crash is likely to persist due to economic uncertainty. Meanwhile, the recent recovery seen in the FTSE 100 and FTSE 250 could well realistically continue.
Therefore, taking a long-term view of stocks could be a logical strategy. It may improve a portfolio’s performance through allowing it time to benefit from compounding as a recovery gradually takes hold after the 2020 stock market crash.
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.