There are currently a significant number of cheap FTSE 100 shares that could deliver high returns over the coming years.
However, some cheap UK shares could merit their current low prices. For example, they may lack financial stability, or be void of a competitive advantage within their industry.
Cheap FTSE 100 shares
The FTSE 100’s market crash means that many companies and sectors trade at lower price levels than they did a few months ago. This may cause some investors to simply buy a range of them, with the aim of profiting from their recovery over the coming years.
However, some stocks are likely to recover quicker and to a greater extent than others. For example, businesses that have solid balance sheets and a competitive advantage may be better placed to survive what is a likely slowdown in global GDP growth. They may even be able to extend their market position to generate high returns in the long run.
Therefore, following Warren Buffett’s advice and seeking the best quality UK shares that are available could be a shrewd move. His preference for buying great companies at fair prices may mean that you may not end up purchasing the cheapest FTSE 100 shares. However, you may be more likely to generate high returns as a result of focusing your capital on the strongest businesses while they offer good value for money.
A margin of safety
Of course, paying too much for any FTSE 100 share could lead to disappointing returns. The index’s recent rebound means that some of its members are trading at higher prices than at the start of the year. This could mean that they offer limited scope for capital returns – even though the companies themselves may produce relatively strong financial performances over the coming years.
Therefore, following Warren Buffett’s advice to obtain a margin of safety could be a worthwhile move. A margin of safety is essentially where an investor buys a stock at a discount to what they think it is worth. This not only reduces their risks, but could equate to larger capital returns over the long run.
Investing with patience
Buying high-quality FTSE 100 shares today could lead to attractive returns in the long run. However, UK shares could be negatively impacted in the short run by risks such as a spike in coronavirus cases, as well as geopolitical risks in North America and Europe.
Therefore, following Warren Buffett’s advice to keep some cash in reserve could be a sound idea. It may enable you to take advantage of potentially lower share prices that could be on offer over the coming months.
Peter Stephens has no position in any of the 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.