It’s no secret that billionaire investor Warren Buffett has an impressive track record of generating high returns. Since the 1960s, his Berkshire Hathaway investment portfolio’s achieved nearly 20% annualised gains – roughly double what the stock market’s delivered over the same period. In doing so, he’s now one of the wealthiest investors worldwide with seemingly unlimited financial freedom.
It’s an envious position to be in. But by following his methods, everyday investors could put themselves on the path to improve their financial outlook.
UK shares have enjoyed a solid rally this year on the back of cooling inflation and falling interest rates. Yet many stocks continue to trade at cheap prices that could turn even Buffett’s head. In other words, now might be a terrific time to kickstart the journey to financial freedom. And doing so could help someone with no savings in 2024 build a surprisingly large nest egg for retirement.
A focus on undervalued shares
Capitalising on underappreciated business has been a core philosophy of Buffett’s investment philosophy and strategy. In more recent years, he’s started being more lenient considering fair prices rather than just cheap ones. But what’s remained constant is his pursuit of quality.
Over the course of decades, the best-performing stocks have almost always been the highest-quality companies. After all, business performance is ultimately what drives prices up. Fortunately for British investors, the FTSE 350‘s filled with such enterprises, many trading at fair prices and a few cheap ones as well.
Take RS Group (LSE:RS1) as an example. The omnichannel distribution business is currently trudging through a cyclical downturn in the global manufacturing sector, especially electronics. Consequently, the stock price has fallen by almost a third since the start of 2022.
Yet despite all the headwinds, the underlying business has proven itself to be quite resilient. Cash generation remains robust, helping lower the group’s leverage and translating into a healthier balance sheet. And to top things off, management recently launched a cost-cutting programme that’s already started delivering results.
Now that economic conditions have started to improve, manufacturing output’s steadily rising across the globe. Therefore, investors may be looking at an opportunity to consider quality shares at discounted prices.
Managing risk
Even if RS Group sucessfully capitalises on the eventual manufacturing sector’s rebound, buying shares today still carries risk. The firm operates in a cyclical industry, and another downturn will almost certainly happen again.
Such threats can be better managed with a healthy dose of portfolio diversification. However, diversifying also has its downsides.
The more stocks an investor owns, the harder it becomes to outperform the market. And it’s why Buffett’s portfolio’s highly concentrated in just a handful of businesses. Portfolio concentration opens the door to potentially significantly higher returns. But it also amplifies the damage from making a bad investment. And even Buffett’s had his fair share of these over the years.
It’s up to individual investors to determine what level of risk they’re able or willing to take. But when risk is managed properly, a portfolio of top-notch stocks bought at good prices can be a powerful way to build wealth in the long run, eventually achieving financial freedom.
