Warren Buffett became one of the richest people on the planet by following a pretty simple investing strategy – buy high-quality shares at low prices. That doesn’t mean investors should be looking at stocks trading for pennies. But rather to find the companies trading at levels below their intrinsic value.
Normally, finding undervalued shares is quite a challenge. But thanks to the 2022 stock market correction, bargains are seemingly everywhere.
As such, adopting and sticking to the Oracle of Omaha’s long-term strategy today could be a shrewd move by investors. And it could drastically reduce the time required to double £1,000, or any investment amount, over the coming years.
Warren Buffett’s search for quality
Just because a stock is cheap doesn’t mean it’s a good investment. Those reside almost uniquely among the high-quality businesses. Yet quality is ultimately a subjective opinion. So how has Warren Buffett consistently differentiated between good and bad companies to buy?
His approach rests on two pillars which, when combined with a bargain purchase price, led Buffett to tremendous success.
1. Financial Health
Regardless of how promising an enterprise may be, it will never thrive if it doesn’t have the financial resources and robust balance sheet to survive.
Looking at liquidity and solvency ratios can quickly identify most financial weak points within an organisation.
2. Competitive Advantages
Businesses are constantly seeking to take market share away from competitors while maintaining their own. And the best way of achieving this is by having a unique set of advantages over the competition that can’t be replicated.
These can come in many forms, such as:
- A reputable brand that customers are willing to pay a premium for
- Bespoke operating procedures that can’t be easily replicated, opening the door to higher margins
- A technological advantage protected by patents
- A network effect where each additional customer adds more value to the product or service
Doubling an investment, Buffett style
With this investment strategy, Buffett’s portfolio has delivered an average annual return of 20.1% between 1965 and 2021.
That’s more than double the stock market average! And if an investor were to replicate this performance, it would only take around three and a half years to turn £1,000 into £2,000, £10,000 into £20,000, £100,000 into £200,000… and so on.
Of course, achieving a 20.1% consistently over decades is a pretty amazing feat. And it’s highly unlikely that most investors can match such returns. After all, there is only one Buffett.
But even if an investor can only hit the FTSE 100’s 8% average, that’s still more than enough to double an investment, given more time. And while the threat of a stock market crash or correction can derail the wealth-building process, the adverse effects on a well-diversified, high-quality, Buffett-style portfolio are usually only temporary.
The post £1k to invest? I’d use Warren Buffett’s method to try and double my money by investing in shares appeared first on The Motley Fool UK.
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