Warren Buffett has a long and successful history as an investor. He has been able to outperform the stock market on a relatively consistent basis.
As such, his strategy could be worth a closer look. His focus on buying undervalued shares and holding them for the long run could be applied to UK shares at the present time, since many of them trade at lower prices than their historic averages.
Although there are still high risks from using Buffett’s strategy and it is not guaranteed to deliver positive returns, it could be a useful guide in the long run.
Warren Buffett’s focus on undervalued shares
Warren Buffett has previously purchased companies when they appear to be trading at a discount to their intrinsic value. In other words, after assessing a variety of factors, including their financial position and competitive advantage, Buffett attempts to place a value on a specific business. Should the stock in question trade at a price that is below that intrinsic, or real, value, there may be a margin of safety on offer that translates into capital growth over the long run.
Of course, some companies may trade at a discount to their intrinsic value for good reason. For example, they may have financial challenges that lead to disappointing performance, or they could even fold. As such, applying Warren Buffett’s strategy is by no means guaranteed to succeed in such cases. However, it does provide an opportunity to potentially purchase high-quality businesses. These could be priced at low levels due to generally weak market sentiment. The stock market has previously recovered from each of its declines. That means there may be a reasonable chance of a recovery for today’s undervalued shares in the long run.
Taking a long-term approach to buying UK shares
As well as focusing on undervalued shares, Warren Buffett also typically holds companies for many years. In fact, many of his current holdings have been part of his portfolio for decades. This means he may be less concerned with their short-term performances, which can include periods of high volatility as the last year has shown.
Although UK shares can see significant falls at times, their overall trajectory has been upwards in the past. For example, the FTSE 250 has recorded an annualised total return of 9% in the last 20 years. That’s despite challenges such as the global financial crisis and 2020 market crash.
Of course, past performance is never a guide to the future. Share prices may fail to grow at all in the long run. However, following Warren Buffett’s long-term view could increase the potential to benefit from an increase in the prices of today’s undervalued shares, as well as the impact of compounding. Over time, this could lead to a surprisingly large portfolio value that provides a greater amount of financial freedom.
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.