The Bitcoin price has surged recently. “Great”, I hear you shout, “I’ll put all my money in that then“. No. Please don’t. Bitcoin is volatile and has surged in value in the past only to then plummet. I think a far more sensible way to get rich and retire early is to invest this year in building a portfolio of shares that can provide you with passive income for life.
This means investing in quality. It means putting money into companies that produce something valuable and make profits. Not an alternative currency that has no true regulatory backing.
How to find quality companies
Finding quality companies obviously isn’t easy – otherwise every investor would make money. But there are ways to do it. For example, look at the company’s sales record – does it have 10 years or more of sales growth? If so, then that’s great. Also, for an investor, it’s ideal to see a high return on capital employed (ROCE) – ideally over 15%
The balance sheet is also important when it comes to quality. This is something I’ve learnt over the last decade of investing in companies. To rule out companies that may struggle, look at the current ratio as part of analysing the balance sheet. This essentially shows if current assets, things like stock and cash, cover current liabilities. Those are bills due in the next 12 months. If the liabilities are bigger, then that’s not ideal.
It’s also good to look for management teams that are stable, own shares, and over-deliver on promises – the integrity of management is a key qualitative measurement for very successful investors like Lord Lee and Anthony Bolton.
There’s more to finding quality companies than just these considerations, but this serves as a starter for 10. As you gain experience you can add more criteria on top to filter down to the very best companies.
How I’d invest in 2021 to create passive income for life
Bearing all this in mind, to create a sustainable and growing passive income, I’m taking action right now. I’ll be looking for companies that match the above criteria. This will likely mean adding to my stakes in Diageo and Reckitt Benckiser. I’ll focus on value shares with quality metrics as these are more long-term investments than growth shares with high price-to-earnings ratios. The latter is good for quick gains. The former is better in my opinion for building a long-term income from investing.
I’m very optimistic about 2021. Once the vaccine is rolled out widely enough, conditions should normalise. Strong businesses should be stronger as they gain market share from weaker businesses that didn’t make it through the pandemic.
I think for investors, including myself, now is the right time to be investing while there’s still some uncertainty and many shares are still cheap. If you wait too long for greater certainty about what will happen next, you’ll have to pay more for shares. To paraphrase Warren Buffett: it’s best to invest when others are fearful.