If I had very few savings as I entered my thirties, could I still build a long-term cash pile that might let me retire early? I think the answer is yes. One way I would try to do that is by building a portfolio of cheap shares to hold for the long term.
Quality and long-term investing
As a believer in long-term investing, when I buy shares I am not looking to benefit from a short-term price jump.
Instead, I am buying a small stake in a business I think has good potential in the years and decades to come. If it does well, hopefully as a shareholder I can benefit.
Hunting for cheap shares
However, whether or not a company is rewarding for me as an investor does not just rely on how good a business I buy into.
It also depends on what price I pay for the shares. Like anything, even the best company can turn out to be a poor investment if I overpay for it.
That is why I would focus my search on cheap shares. By that I do not necessarily mean shares with a low price, like Rolls-Royce and Lloyds Bank, whose shares both trade for pennies. By cheap, I mean the share price offers me value compared to what I perceive as the long-term value of the business.
How to value shares
Of course, no one knows today what the long-term value of a business is. So I will need to make some assumptions. That is why, like Warren Buffett, I stick to businesses and industries I understand. That makes it easier for me to assess their prospects.
By looking at the probable future size of a market and a company’s business, I can work towards an estimate of its earnings. I can then value it using a method like the price-to-earnings ratio. If the shares are much cheaper than I think they should be, I could consider adding them to my portfolio.
But earnings are only part of the equation. I also want to know what might stop the company sharing those earnings with shareholders or reinvesting them in business growth. That is why I also always look at what debt a company carries on its balance sheet.
Starting today
So if I was 30 and wanted to put such a plan into action, what would I do?
A lack of savings is not necessarily problematic: I could start to put aside a set amount each week or month and use it to build funds to invest. I would hunt for a variety of cheap shares to buy, bearing in mind that to reduce my risk I would want to diversify across a range of companies and industries.
I would then let time have its effect, hopefully seeing the value of at least some shares increase while using dividends to boost my available investment funds. If I can grow the value of my investments over time, hopefully that could help me bring forward my retirement date!
