It may seem unlikely that someone with hundreds of billions of dollars could have anything in common with the average retail investor trying to save for retirement. But I believe that Buffett’s principles and investing philosophy are applicable to anyone looking to compound their wealth.

Here’s how thinking like Buffett can help you in your own investing.

Don’t panic

Buffett has famously made some of his best deals during market crises. When everyone else is selling everything they own to meet their debts, Buffett’s Berkshire Hathaway is typically sitting on a pile of cash. Buffett and his partner, Charlie Munger, stand ready to buy up depressed assets. How is this applicable to someone looking to invest £2,000 in FTSE 100 stocks?

You need to understand the reasons why shares of otherwise quality companies tend to collapse in times of trouble. The first, and most obvious, reason is that investors generally panic. Even when a market crash is caused by a non-financial event like the coronavirus outbreak, there is still worry that some previously unknown systemic financial problem might rear its head.

Look out for forced liquidations

The second reason why good companies get hit in times like these is leverage. Many investors borrow to purchase stocks and bonds and other financial instruments, meaning they are leveraged. It is a high risk/high reward investment strategy. There are rules governing how much leverage an investor can have.

When the value of their holdings declines, investors can find themselves having too much leverage. Creditors have to issue what is called a ‘margin call’ – a demand to put up more collateral. Investors may find themselves having to sell shares of high-quality FTSE 100 companies just in order to meet their margin calls. These could be institutional investors with large positions, needing to sell in a hurry. This leads to the creation of bargain opportunities. 

During the 2008 financial crisis, Buffett and Munger got great deals by bailing out major US banks like Goldman Sachs. It is unlikely that you will get to be in a similar position, to buy up significant positions in large financial institutions. However, you can certainly adopt their mentality and look for smaller bargain opportunities.

When everyone else is running for the hills, it really does pay to have some cash on hand. Berkshire Hathaway has upwards of $128bn (around £103bn) in cash ready to deploy. Although Buffett has yet to make any big buys in this crisis, I believe that it is only a matter of time before he does.

The post Warren Buffett’s advice can help you find FTSE 100 bargains in this market crash appeared first on The Motley Fool UK.

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Neither Stepan nor The Motley Fool UK have a position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

That said, a lot of dividend-paying companies are in cyclical sectors (like energy). This means that even if the industry has a down period, you can be reasonably sure it will turn around at some point in the future. Here are two tips that I think all FTSE 100 income investors should know.

It’s not just about the yield

It’s a common misconception among novice income investors that the most important factor is dividend yield. After all, the higher the yield, the more money you will receive, right? Not necessarily. The yield that you will see quoted if you research your chosen company is based on the dividend that has been forecast by the business in its latest trading update. The yield is a measure of how big the dividend is relative to the share price. 

You could easily have a situation where the share price tanks as a result of some unforeseen event, but management has not yet updated its dividend to reflect the new market conditions. In this case, the yield would be high, but it would not be an accurate reflection of reality. For this reason, you must always closely scrutinise a company’s financial statements to figure out whether it is likely to fulfil its promises. Of course, if the business hits a rough patch and its yield spikes, but it has a large cash buffer, there is a decent chance it is still a good value buy. But do remember that a high yield can be a danger sign suggesting a company is on shaky ground. If a generous yield seems too good to be true, it often is. In that case, you should do more research.

Pay attention to total return

A company that returns a lot of cash to its shareholders through dividends is not necessarily doing right by them in the long run. Many investors buy shares for dividend income. But dividends should not be paid out if it harms the company. That could mean taking on debt to pay dividends. Or it could mean neglecting investment to pay them. Some money should only be returned to investors if there is no way to put it back into the business, as the latter is more tax-efficient than paying dividends. For this reason, a company with a 5% yield might be a better investment than an equivalent company with an 8% yield. If the former is putting its cash flow to better use by expanding the business or even building up reserves of cash as a buffer against unexpected events, that is a sign of careful management. 

Income investing is about getting dividends, yes, it is also about picking businesses that will give you a decent total return (income from dividends plus capital appreciation) for the long term. So never lose sight of the bigger picture when looking for great income stocks.

The post 2 tips for FTSE 100 income investors during the coronavirus market crash appeared first on The Motley Fool UK.

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Neither Stepan nor The Motley Fool UK have a position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

A losing proposition

Here’s the number one problem with holding cash in a long-term savings account: it’s the policy of virtually every Western government and central bank to have inflation averaging 2% annually. It’s also the current policy of almost every Western central bank to keep interest rates low. This seems unlikely to change significantly any time soon. 

The US Federal Reserve and the Bank of England were both forced to cut interest rates (from already low levels) in response to the coronavirus pandemic. Currently, the Bank of England’s base rate (the benchmark interest rate that all other rates in the economy are based on) is just 0.1%. This explains why the very best rate that you can hope to get on a Cash ISA is around 1.65%. 

So why would you accept a 1.65% annual rate of return on your cash when it’s the stated government policy to have the value of that cash decline by 2% due to inflation? Sure, the government might not be able to hit that target, but it seems like a bad idea to bet against it, particularly given how much financial power it has.

Stocks and Shares ISA

By contrast, the FTSE 100 has returned an average of 6.4% annually over the last 25 years, assuming reinvestment of all dividends. Investing £1,000 every year for 25 years at that rate would yield a total sum of almost £66,500. Now, of course there are some ups and downs within that period: the dotcom bubble over the early 2000s, the 2008 financial crisis, today’s coronavirus market crash — these are all periods of significant falls. But over the course of an investor’s lifetime, the data shows that investing in a Stocks and Shares ISA nets a better overall return than holding cash. 

Moreover, the current depressed valuation of the FTSE 100 provides new investors with an excellent entry point to start building up their retirement wealth. This underlines another important factor in investing: you can’t time the ups and downs of the market, but you can determine when stocks are cheap, and when they’re expensive by looking at metrics to like price-to-earnings ratio, price-to-book ratio and dividend yield.

That’s how you plan for a future that’s not only dependent on a low State Pension. Buying cheaply and adopting a long-term perspective can reap rich rewards.

The post Forget a Cash ISA. Here’s why I’d invest £1,000 in the FTSE 100 today! appeared first on The Motley Fool UK.

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Neither Stepan nor The Motley Fool UK have a position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Unsurprisingly, one of the sectors most severely hit in recent months is the energy sector. For instance, the Vanguard Energy ETF, which contains US giants like Exxon Mobil and Chevron, is down around 42% from February, compared to the S&P 500 (down 17.5% over the same period) and the FTSE 100 (down 25%). What does this mean for UK investors? Let’s dig in.

Survival of the fittest

Hammered by falling demand and excess supply, the price of a barrel of Brent crude oil (the global benchmark) is at $28 (£22). That’s approaching 20-year lows. This has created a lot of anxiety for US shale producers. They’d already been under some pressure even before the current crisis. For one thing, a lot of the easily accessible shale reserves in North America have already been tapped, so the per-unit costs of extracting more crude have been increasing. Last year, the number of bankruptcies in the shale industry increased by 50%. And there’s no doubt that there will be many more than that this year. 

Why does that matter to UK investors? I think that a shale shakeout might actually end up being good for oil majors like Royal Dutch Shell (LSE: RDSB) and BP, as the industry consolidates around stronger players in this space. Shares of Shell are currently trading with a 10% dividend yield. That’s not at good as the 17% yield it had when I wrote about the company a few weeks ago. But it’s still a historically good bargain. Of course, high yields should always be scrutinised very closely. They often signify that the market doubts the ability of the business to deliver on its promised dividend. But in Shell’s case, I think the reward justifies the risk. Shares of Shell are down 43% since early January, implying a large potential upside if the oil war is resolved.

In everyone’s interest for energy to recover

And there has been some progress on the negotiation front. US President Donald Trump has attempted to broker a deal between Saudi Arabia and Russia. He’s floated the idea of tying any aid for US oil producers to output cuts. Or perhaps the US government could buy up excess supply. These would be very unusual steps, of course. The US oil market isn’t state-controlled in the same way that the Saudi and Russian markets are, so the President can’t rule by decree. 

But the fact these talks are even happening demonstrates that there’s a lot of political will to resolve the crisis. It’s in the interest of every party to establish a price floor for the price of oil. All of these factors combine to make Shell and other FTSE 100 energy companies attractive at current valuations, I feel.

The post Stock market crash: I’d look at FTSE 100 energy companies right now appeared first on The Motley Fool UK.

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• The 2026 stock market sell-off could be a rare opportunity to build wealth in an ISA

Stepan Lavrouk owns no shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

There are many studies that demonstrate that missing the 10 best market days over a long enough investing period will more than halve your returns. But if this is true, then why do so many investors struggle with building a good nest egg for their retirement portfolio? Here are the main reasons why.

FTSE 100 investors don’t stick to their ideas

As a captain on my old football team used to tell me: “It’s not easy, but it is simple”. This applies to investing as well as sport.

It’s not that it is hard to find a winning investment strategy – there is plenty of evidence that demonstrates that consistently buying a diversified portfolio of cheap, high cash flow companies, and then holding them for long periods of time is the best way to go. That’s the simple part. The part that is not easy is sticking to your simple strategies. 

One of the main reasons why so many investors fail to generate the returns that they want is boredom. Reading about companies with great potential and analysing and projecting out their futures is a pretty rewarding experience. Sitting around and waiting for the market to recognise the same things that you have seen is less so.

When we talk about holding stocks for long periods of time, we don’t mean weeks or months – we mean years. Sometimes doing nothing is much harder than doing something.

Investors try to do too much and lose focus

The other big reason why investors often find themselves underachieving in terms of the results they want is that they get distracted by the huge amount of choice available in today’s stock market.

Like a child in a sweet shop, they run from treat to treat, not able to focus on one specific thing. One day they might be interested in buying cheap energy stocks, the next they are looking at rapidly expanding technology companies, and the day after that they are looking for a safe dividend paying stock.

Now, while there is nothing wrong with diversification – as mentioned earlier, it is in fact very important – lack of focus is certainly a problem. Everything has an opportunity cost. The time you spend researching different strategies and sectors could be better spent becoming an expert in one particular area.

Warren Buffett often talks about his “circle of competence” – things he knows a lot about (like insurance) lie within this circle, and things that he does not know a lot about (like technology) lie outside. Figure out what your own circle looks like and focus on the things that you are already good at. You will find that this is a much better use of your time than running around the sweet shop.

The post Why do investors fail to take advantage of FTSE 100 crashes? appeared first on The Motley Fool UK.

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• How much passive income could a Stocks and Shares ISA pump out every year?
• With the FTSE 100 down 5%+ investors should remember this legendary quote from Warren Buffett
• 1 FTSE 100 stock that could benefit from higher inflation
• The 2026 stock market sell-off could be a rare opportunity to build wealth in an ISA

Neither Stepan nor The Motley Fool UK have a position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

It was widely believed that the figure would be the worst ever recorded, and much worse than forecast. The previous week’s number was 282,000. The consensus forecast was 1.6 million. The actual number was more than twice as big: almost 3.3 million. And what do you think happened? The market rallied almost 8%. 

Be on the second level

What is the point of this story? I’m not saying that you should buy or sell stocks based on economic data that comes out (unless it results in stocks becoming exceptionally cheap). That is speculation, not investing. What I am saying is that predictions based on what everyone else knows rarely work out. You can’t invest based on what everyone else knows. You need to think about what everyone else doesn’t know. Value investor Howard Marks calls this ‘second level thinking’.

If you are trying to beat the market, then it doesn’t make sense to do the same thing that everyone else does. At that point, you might as well just buy the index. You need to think about what everyone else is going to do, and position yourself accordingly. For instance, if everyone believes that a company is going to the moon, then the stock is likely to be extremely expensive. In this case, you should do the opposite of what everyone is doing and stay away. Conversely, a company that everyone believes is destined for failure is likely to be extremely cheap.

Make sure you buy cheap

Now, this isn’t to say that you should only buy unfashionable stocks (although there are studies that demonstrate that consistently buying the cheapest percentiles of the FTSE 100 or the S&P 500 is a winning strategy), and  you should certainly always do your own research. But if you try to think differently to everyone else, you can be sure that you are consistently in a position to buy cheap stocks. 

Making sure that you buy cheap is one of the biggest factors in building a winning portfolio. You can’t time the market – and you should be skeptical of anyone who claims they can – but you can make sure that you deploy capital in places where it can go as far as possible. You need to look at metrics like price-to-earnings ratio and dividend yield and look for the best bargains available. If you do that, and try to be different to everyone else, you don’t need to worry about timing the market.

The post How FTSE 100 investors should use the coronavirus crash to their advantage appeared first on The Motley Fool UK.

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• The 2026 stock market sell-off could be a rare opportunity to build wealth in an ISA

Neither Stepan nor The Motley Fool UK have a position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

If you are an astute investor, you will no doubt have been doing some bargain hunting of your own. But if you are a human being, you will also no doubt have felt at least some unease while doing so.

It can be difficult to master your emotions during times like these. Here are the two mistakes you must avoid to successfully invest in FTSE 100 shares during crises.

Don’t get left behind the (investing) curve

A few weeks ago, when panic was really starting to take hold in the markets, I saw a chart that looked at the number of Google searches for the term ‘how to sell my stocks’. The chart showed the number of searches increasing by a factor of four last week, when the market had already sold off more than 20% from its high.

This illustrates mistake number one. If you are searching for ways to sell your stocks, then you are probably already too late. There are reasons why so many amateur investors lose money during market crashes. Like every other investor, they are unable to time the market. Unlike professionals, they are typically unhedged, meaning they are more exposed to downturns. And, they move slower than everyone else. This means that when they do sell, they get the worst possible price. All of these factors combine to disadvantage the private investor.

What should investors do about this? Try to not get caught up with the herd. I’m not saying you should never sell stocks (particularly if your thesis about them changes). What I am saying is that you need to make your own decisions, and not let yourself be affected by what other people are doing.

Value matters more than timing

I’ve already mentioned that I do not think it is possible to perfectly time the stock market. During a crisis, this means that  you are unlikely to be able to buy the absolute bottom. As a result, your holdings will probably decline after you buy them.

While this can be extremely stressful, the best way to put your mind at ease is to concentrate on finding stocks that are cheaply valued, rather than waiting for what you think the lowest price will be. 

Consider metrics like price-to-earnings ratio, price-to-book, dividend yield, free cash flow, and how these data compare to the competition. Also, make sure that you look for safer companies – those with strong balance sheets, low amounts of short-term debt, and large cash buffers.

Remember, when markets sell off, even quality companies get caught in the stampede. Your job is to make sure that you find the quality ones.

The post 3 investing mistakes to avoid during the coronavirus FTSE 100 market crash appeared first on The Motley Fool UK.

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• How much passive income could a Stocks and Shares ISA pump out every year?
• With the FTSE 100 down 5%+ investors should remember this legendary quote from Warren Buffett
• 1 FTSE 100 stock that could benefit from higher inflation
• The 2026 stock market sell-off could be a rare opportunity to build wealth in an ISA

Neither Stepan nor The Motley Fool UK have a position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

However, it’s really not as simple as ‘buying the dip’. If it were that easy, everyone would do it. Here is what I think investors need to bear in mind when bargain shopping in the near future.

Not all dividends are equal

In times like this, the dividend yield on premier income stocks can get extremely high as share prices fall. For instance, shares of Royal Dutch Shell (LSE: RDSB) are currently yielding almost 14%. Tour operator Carnival (LSE: CCL) is yielding 16%.

The important thing to remember is that not all dividends are equal. Even in normal times, a high dividend yield is generally a sign that the market does not believe the payout promised by management will materialise. The higher yield reflects the risk inherent in the investment. 

This is even more true in today’s environment. So you need to look at each company separately and decide whether the high yield is worth the risk.

Shell

Let’s look at the example above. On one hand, we have Shell, a company that hasn’t cut its dividend since World War II. It has a strong balance sheet, and is therefore able to support its dividend in the short term. Its decline has been worse than average, but has also been driven primarily by the drop in oil price, which many people believe to be unsustainable.

I think that even if Shell were to suspend or cut its dividend, the company itself would survive and would still be able to generate solid cash flow in the long term.

Carnival

On the other hand, you have Carnival, whose entire source of revenue has dried up until at least the end of the summer (the main holiday period in the Northern hemisphere). Operating cruise ships is a very capital-intensive business, which mean these businesses have a very narrow margin for error.

To make matters worse, Carnival is heavily dependent on cash flows from its business to service its considerable debt load. In its annual trading update for 2019, the company disclosed $518m (£436m) in cash or cash equivalents, against short-term borrowings of $231m (£195m).

Last week, the company announced that it would be using its $3bn (£2.52bn) credit line to increase its cash position.The irony is that last year Carnival spent $600m (£506m) on buybacks and $1.39bn (£1.17bn) on dividends. That spending spree was financed, albeit indirectly, by taking on $1.4bn (£1.18bn) in debt.

It seems pretty likely that Carnival will have to cut its dividend substantially, and in fact it’s very future could be in question. So tread lightly when looking for bargains.

The post The crucial thing to remember when buying FTSE 100 income stocks during the coronavirus crash appeared first on The Motley Fool UK.

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• How much passive income could a Stocks and Shares ISA pump out every year?
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The Motley Fool UK has recommended Carnival. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Too good to be true?

On the other hand, as regular readers also know, an extremely high dividend yield is not always a good sign. In fact, it often signals that the market does not believe that the company in question will be able to pay the dividend that has been forecast. This is true of companies in the energy sector today more generally, and of Royal Dutch Shell (LSE: RDSB) in particular. Shares of this oil giant are currently trading down 67% from their pre-coronavirus highs, which translates to a whopping 17% dividend yield. 

The economic impact of the virus and subsequent quarantines has led to a fall in demand for energy. In addition, oil companies have been hammered by the price war instigated by the Saudis against the Russians, which has resulted in the price of Brent crude (the global oil benchmark) to collapse to below $30 a barrel. Obviously this impacts margins for oil producers.

Reasons to be hopeful

However, I still think that Shell represents an opportunity for investors brave enough to take a contrarian stance. For one thing, Shell hasn’t cut its dividend since World War 2. Of course, the past is no guarantee of the future. But this fact does imply that management will be extremely reticent to cut. And even if the dividend were to be cut in half, that would still be a significantly higher yield than the FTSE 100 average of 6.75%.

There are also a number of reasons to believe that Saudi Arabia’s scorched earth strategy is unsustainable. The Kingdom’s break-even oil price (the price per barrel at which it can balance the budget) is around $80. This is much higher than both Russia’s (around $40) and the US shale producers that this strategy is designed to hurt the most (around $42). The Saudis could certainly run deficits for a while. But it’s not clear whether they would want to do so in the current environment, with global growth slowing dramatically. 

Sure of Shell?

That said, I don’t think that investors should buy stocks based solely on what they think will happen in the world of geopolitics. However, I do think that investors should assess the relationship between risk and reward. And in this case, there are many reasons to be bullish on Shell. The company is trading at historically low levels.

It has a decent balance sheet that will allow management to defend the dividend, for the near-to-mid term. It is a systemically important company, making it a prime candidate for government support. And its low share price means that even if dividends are suspended, management could still buy back stock at these very attractive valuations.

The post Shares of Royal Dutch Shell yield almost 17%! Can that be right? appeared first on The Motley Fool UK.

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• How much passive income could a Stocks and Shares ISA pump out every year?
• With the FTSE 100 down 5%+ investors should remember this legendary quote from Warren Buffett
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• The 2026 stock market sell-off could be a rare opportunity to build wealth in an ISA

Stepan Lavrouk owns no shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

In investing, whenever you act, you are effectively saying, “I know more than the market. I am going to buy when everybody else is selling. I am going to sell when everybody else is buying”. That is arrogant, and we always need to temper it with the humility of knowing we could be wrong – that things can change – and acknowledge that we have a lot of smart competitors.

In other words, investing is a fundamentally arrogant act (at least in part). It takes a lot of self-confidence to say that you know better than the millions of other well informed investors, many of whom are professional money managers. This is particularly true when it comes to large cap stocks – those that are followed by hundreds of analysts at dozens of investment banks and brokerages. And so you must think very long and hard before deciding to put yourself out there and claim that you know better.

The opportunity

I think that Royal Dutch Shell (LSE: RDSA) is one of those cases where investors need to look at the facts and conclude that they are looking at a perfect opportunity. Here are those facts. Shares of Shell are currently trading at an almost 8.5% dividend yield. This is almost double the yield for the FTSE 100 as a whole (4.6%). Naturally, a high dividend yield on its own is not a reason to buy a stock – indeed, it is often a reason for caution, as it can indicate that a dividend cut is in the offing. However, Shell hasn’t cut its dividend since World War 2 – a very impressive record that I think makes it highly unlikely that today’s management will want to be the first in over 70 years to do so.

Moreover, I also find Shell stock to be reasonably priced. It is currently trading at a price-to-earnings ratio of 8.8 and its share price is approaching 20-year lows. Naturally, the coronavirus outbreak, which has been responsible for the recent stock sell off, has weighed on the share price. Additionally, it seems reasonable that the resulting economic slowdown in China will have a dampening effect on oil demand. And to top things off, oil prices are currently at the lowest they have been in two and a half years, which of course translates to lower margins for oil producers like Shell.

But I also know that oil prices are cyclical, that economic activity will eventually resume, and that valuation matters. Unless we all stop needing oil tomorrow, I think this is a great opportunity for income investors looking to add to their retirement portfolios.

The post Looking for value while stocks are falling? I like this FTSE 100 large-cap currently yielding 8.5%! appeared first on The Motley Fool UK.

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• How much passive income could a Stocks and Shares ISA pump out every year?
• With the FTSE 100 down 5%+ investors should remember this legendary quote from Warren Buffett
• 1 FTSE 100 stock that could benefit from higher inflation
• The 2026 stock market sell-off could be a rare opportunity to build wealth in an ISA

Stepan Lavrouk owns shares of Royal Dutch Shell. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.