Investing successfully in order to enjoy a financially-free retirement can seem to be a daunting task for many individuals. It is, after all, tough to know where to invest hard-earned cash in order to generate a high return, but at the same time not take too much risk.
One investor who seems to make the process somewhat simpler is Warren Buffett. His investment style is fairly straightforward, and following it could lead to improved results for those who are seeking to generate a sizeable nest egg in time for retirement. And with the State Pension age on the rise, doing so may become even more important over the long run.
Long-term investing
While many investors become impatient when their investments fail to rise materially over a period of months, Buffett is very loyal when it comes to the companies he owns. He is prepared to give them the time they require in order to generate improving returns. Sometimes, this can mean holding the stocks in question over many decades, with some of his biggest holdings having been among his purchases from his pre-billionaire days.
With the world becoming increasingly fast-paced due in part to improved technology, it may seem counterintuitive to follow a more pedestrian investment style. However, holding on to companies over a long time period may allow them to successfully implement new strategies, as well as capitalise on the growth opportunities they have in a variety of key markets.
Economic moats
Identifying whether a company has an ‘economic moat’ can be challenging. However, doing so can be worthwhile, since it may stack the investment odds further in an investor’s favour. Particularly during more challenging periods for the economy, a company with a wider economic moat may be better able to cope with challenging trading conditions. This may lead to them being able to win market share, which can lead to improving financial performance in the long run.
Although stocks with wide economic moats may not be cheap, Buffett seems to be prepared to pay a fair price for them. As such, focusing solely on value, rather than price, could be a sound move for an investor seeking to generate high returns over the long run.
Holding cash
While holding cash over the long run is a sub-optimal use of capital due to its low returns, having cash on hand in preparation for the next stock market crash is a sound move. With the stock market moving in cycles and experiencing a bear market on a fairly regular basis, following Warren Buffett and having spare cash can mean that an investor is able to pounce on severely discounted stocks during periods when few investors are seeking to buy.
With most investors having long-term views, holding cash for a few years and earning a low return may not be a major issue if they are able to capitalise on difficult periods for the stock market. Doing so could allow them to use the stock market to their advantage – just as Buffett has done in the last 70+ years.