I’m always on the lookout for cheap shares. But so is everyone else. So let’s take a look at how I’d go about identifying these value shares, and how I’d start investing at the age of 30 to achieve millionaire status.
Starting from scratch
With a house purchase on the cards, it’s highly likely I could enter my 30s without any investments. So how could I reach millionaire status in over the coming decades?
Well, I’d start by taking inspiration from Warren Buffett — the legendary US investor and Berkshire Hathaway boss. Many are unaware that he built 99% of his wealth after the age of 50.
The so-called ‘Oracle of Omaha’ is known for his value-investing strategy. This involves picking stocks that appear to be trading for less than their intrinsic or book value.
Intrinsic value is a simplified way of looking at assets or a company. Buffett is essentially looking for meaningfully undervalued stocks, those where the market-cap is below what Buffett considers to be its intrinsic value.
So this means I need to be on the lookout for meaningfully-undervalued stocks and buying at attractive entry points.
Finding value
Buffett often talks about a margin of safety. This is an investing principle that involves only buying when the market price is substantially less than a stock’s intrinsic value.
There are several ways to identify cheap stocks. Finding meaningfully-undervalued stocks requires me to do my own calculations, looking at metrics like discounted cash flow, price-to-earnings, EV-to-EBITDA.
So I need to calculate what I think a stock is worth, and then see if it’s discounted.
Buying the dip
While the FTSE 100 might be hovering around 7,500, the truth is many stocks are trading at considerable discounts over one-to-five years. In general, there are several reasons for this, including the negative macroeconomic environment.
But buying now presents a rare opportunity. If I buy top-quality UK shares today while stock prices are cheap, I could drastically reduce the waiting time in my quest to get rich.
And there’s another angle. While buying undervalued stocks can increase my capacity to make money, it also reduces my risk of losses.
Regular investment
It’s important to follow Buffett’s lead, but the crux of my investment strategy will have to be investing regularly and using a compound returns strategy.
This revolves around reinvesting dividend payments and, for me, is among the safest ways to grow my portfolio.
Here’s how the calculation works. If I invested £10,000 as starting capital in dividend stocks paying 5% yields, and then invested £1,000 a month for 32 years while reinvesting my dividend payments, at the end I’d have £1m. I have to remember, of course, that none of these gains are guaranteed, and I could lose money as well as making it.
It might all sound like a lot of money to set aside, but I’m sure I’d be grateful at the end. It’s also worth noting that this calculation doesn’t include the upward trend in share price prices over time.
The FTSE is roughly four times bigger today than it was 30 years ago. So as a rough calculation, that £1m could actually be worth £2.5m!
