Warren Buffett is one the best known investors worldwide. However, what many people don’t know is that he built 99% of his wealth after the age of 50.
While Cathie Wood is famous for her focus on emerging and disruptive technologies, Buffett is known for his value investing strategy. This revolves about searching for meaningfully undervalued stocks and buying at attractive entry points.
Investors using the Warren Buffett strategy will likely hold their stocks for the long run, and sell when the market price reflects their valuation of the company.
If I had almost no savings at 30 — and this may be the case after a forthcoming property purchase — I’d try to emulate Buffett. So, what should I be doing?
1. Focus on intrinsic value
Intrinsic value is a simplified way of looking at assets or a company, and tends to ignore future fluctuations and other considerations. Some stocks are rarely viewed in this way — notably growth stocks which are valued on possible future revenue generating capacity.
Buffett looks for a margin of safety. For example, if a company trades for £2 a share, but its assets are worth £3 a share, then there is a margin of safety of £1. This is a characteristic that helps us avoid losing money.
In building on this, Buffett always focuses on quality. The Berkshire Hathaway boss says it is better to pay a fair price for a wonderful company than a wonderful price for a fair company. As such, we can see that Buffett isn’t interested in the risks associated with distressed stocks.
By reducing risk, Buffett aims to minimise losses. As he says: “The first rule of an investment is don’t lose money. And the second rule of an investment is don’t forget the first rule.”
2. Do your research
Buffett doesn’t follow the crowd and that’s one way he’s able to buy stocks that trade at discounts to their asset value or deserved market rate. So, what does this mean for me?
Well, I can invest like Buffett by doing my own research and finding pockets of value in the market without making investments into distressed assets. And by following the crowd, I could fall into the trap of investing in companies that are overvalued.
For me, this means every time I explore an investment, I start by checking its fundamental data. What does the price-to-earnings ratio tell me? What’s its net debt/cash position? What’s the enterprise value of this stock?
All these metrics help build a picture as to whether a company is undervalued or overvalued.
3. Taking a ‘forever’ position
While Buffett might sell shares regularly, he invests as if he is going to hold those shares forever and doesn’t take short positions.
It’s always worth remembering that the general trend of the stock market is upwards. For example, the FTSE 100 is approximately three times larger today than it was 30 years ago. And by investing in shares that are meaningfully undervalued at the time of purchase, I can hope to accentuate this upward trend in the market.
By combining this with my compound returns strategy, I can hope to build wealth in the long run.
