Why I’d ditch gold and follow Warren Buffett’s investment tips in 2020

I think Warren Buffett’s value investing strategy could beat gold’s rise in the long run.

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The last 12 months have been very successful for investors in gold. The price of the precious metal has risen by around 15% in 2019, and it could continue this trend in the short run due to low US interest rates and fears surrounding the global economy’s outlook.

However, long-term investors may be better off buying shares rather than gold. Many high-quality businesses currently trade on large discounts to their intrinsic values, which could lead to favourable risk/reward ratios.

Investors such as Warren Buffett have successfully adopted a value investing strategy over many years. It has enabled them to capitalise on the cyclicality of the stock market. Doing likewise could improve your long-term financial future.

Gold’s potential

Gold’s price rise in 2019 has largely been driven by a loose monetary policy in the US. Due to fears surrounding the prospects for the US economy, the Federal Reserve has reduced interest rates during recent months. This has caused interest-producing assets to become less attractive compared to gold, which has helped to catalyse the precious metal’s price.

Additionally, fears about a global trade war appear to have caused investors to pivot towards defensive assets. Gold has a track record as a store of value, which may have appealed to risk-averse investors. This trend may continue in the near term, with the outlook for the world economy being relatively uncertain.

Value investing appeal

While share prices may not produce high returns in the short run, there is an opportunity for investors to take advantage of the low valuations of many FTSE 100 and FTSE 250 stocks. In many cases, they trade on ratings that are significantly lower than their historic averages despite them offering improving growth prospects.

In the long run, buying high-quality businesses while they trade on low valuations could be a successful strategy. Warren Buffett has a long track record of buying shares while other investors are selling them. This enables him to build a portfolio of companies that have favourable risk/reward ratios, which can produce higher returns in the long run.

Of course, buying companies that have a solid balance sheet, an economic moat and a strong growth strategy is also very important. With the FTSE 100 offering a yield of over 4%, investors may have a large amount of choice when it comes to seeking high-quality companies that offer wide margins of safety.

Outlook

Adopting a value investing strategy in 2020 could be a good idea. Certainly, there may be scope for share prices to fall in the near term after what has been a decade-long bull market. But with gold having risen sharply in 2019 and the stock market still appearing to offer good value for money, now may be the right time to capitalise on the cyclicality of share prices.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

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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