Pension pots are being stretched as an ageing population puts strain on the coffers. Job security is less certain, and wages are stagnating. The popular plan to retire in your 60s seems less and less achievable, so is retirement before this age even possible? Through value investing, I believe it is. The earlier you start, the better your chances of achieving your goal and these unprecedented times may offer you an opportunity to get going.
Stock market investing
There are a few ways to approach stock market investing. You could become a day trader, buying and selling repeatedly throughout the duration of the day. This is a highly volatile and difficult process to master, and one I think is best left to the professionals. Alternatively, there is penny stock trading, which is when you buy shares that usually cost no more than a few pence in the hope of making massive returns. This is another risky way to approach investing. You could get lucky, but most newcomers to penny stock trading get their fingers burnt. My preferred way to do it is value investing. This is the strategy used by Warren Buffett and Charlie Munger. These two billionaire investors have made their fortunes at a slow and steady pace.
What is value investing?
Value investing involves buying shares in a company that looks like it will grow, a company with a share price that appears to be undervalued and is already established. Even the best companies go through problem periods, but this does not mean they are done for. Far from it, a bad period often gives them the opportunity to step back, look at where they have gone wrong and rise from the ashes reborn, stronger. Covid-19 has thrown a spanner in the works for many businesses, but the strongest will survive by ruthlessly streamlining, realigning their goals and focusing on future stability.
How do you identify a high-quality company? Well, there are few points to consider that can help you. A brand-new company with great potential but no proven experience will always be a risky bet. Therefore, choosing a company with lots of experience under its belt is a good place to start. The FTSE 100 and FTSE 250 are full of such companies.
A long-term horizon
Value investing begins with a long-term time horizon. It is not a get-rich-quick approach and slow and steady wins the race. A few points value investors use to evaluate companies include:
- A passionate management team focused on delivering shareholder value
- A low price-to-earnings ratio (traditionally below 10)
- Room for growth
- Little to no debt
- Rising free cash flow
It is important to have faith and discipline when value investing, particularly during times like these. It is also wise not to impulse-buy or sell. Volatility is rife and you can easily make losses if you let your emotions guide you. A consistent approach to investing can help you get rich and may even allow you to retire early.
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.