Warren Buffett has often shared advice about managing finances and building wealth. When it comes to handling a paycheck, his guidance emphasises the importance of prioritising savings, avoiding unnecessary debt, and making informed financial decisions.
When it comes to the paycheque, Buffett recommends saving a portion of income before spending on anything else. As he famously said, “Do not save what is left after spending, but spend what is left after saving”.
Putting this into practice
So, how can good investors put this into practice? Well, quite simply by committing to contribute a fixed amount to our investment portfolios, preferably through a direct debit-type arrangement. This approach ensures consistency and can remove the temptation to try to time the market, as the investment is made regardless of market conditions. Over time, this strategy leverages the power of compounding and reduces the emotional biases that can hinder long-term financial success.
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Now, don’t lose it
The next important piece of advice is Warren Buffett’s first rule of investing: “Don’t lose money.” This simple yet profound rule emphasises the importance of preserving capital and avoiding unnecessary risks. Successful investing isn’t just about making gains but also about protecting against losses that can significantly erode wealth over time. As I often note, if you lose 50% on an investment, you’ve got to make 100% to get back to where you started. That’s tough.
Instead, Buffett advises investors to adopt an approach that allows for a margin of safety. This can mean different things to different investors. As a growth-focused investor, I often see the price-to-earnings-to-growth (PEG) ratio as a good starting point. If the PEG ratio is significantly discounted versus the sector average, I will then take more time to evaluate the opportunity.
One investment to consider
While there are plenty of stocks on my radar, one that I find particularly interesting is Standard Chartered (LSE:STAN). I actually had to sell my shares in the growth market focused bank before buying a house, but it’s a UK-based investment that I’m once again considering.
So, why is this? Well, the FTSE 100 stock is trading around 8.1 times forward earnings. That’s a significant 35% discount to its global finance peers. However, the bank is actually expected to register industry-leading earnings growth over the medium term. I’ve seen forecasts close to 20% growth, but my calculations suggest that earnings will growth by an average of 12.1% annually over the next three to five years. In turn, this leads us to a PEG ratio of 0.67.
Not only is a PEG ratio of 0.67 cheap — traditionally anything below one is considered discounted — but it’s very unusual for a dividend-paying bank. The current dividend is 2.5% and this is expected to grow to 3.1% by 2026.
However, it’s important to note that with substantial operations in Asia, Africa, and the Middle East, Standard Chartered is susceptible to geopolitical tensions, such as US-China trade disputes and regional instabilities, which can impact its performance. It’s a stock I’m keeping a close eye on.
