If you’re looking to invest money in the stock market for the first time, or even if you’re a seasoned investor, listening to Warren Buffett’s advice could be a wise move. The investing genius has decades of experience and vast amounts of wealth to show for his time in the market. What’s more, his investment strategy is remarkably straightforward.
With that in mind, I’d follow Buffett’s example and buy cheap UK shares today. As long as you’re in it for the long term, it could massively boost your chances of making a million.
Where to invest money in the stock market
Deciding to invest your money in the stock market is one thing. But deciding which companies to invest in is a whole new conundrum. With a vast array of firms listed on the London Stock Exchange, UK investors are spoilt for choice when it comes to pouring money into high-quality businesses.
On top of this, many such companies are trading on reduced valuations these days. That’s a result of the recent stock market crash. As well as offering a wider margin of safety, it means that now could be an ideal time to buy shares, provided you’re in it for the long run.
Don’t get me wrong, share prices seem set to remain volatile over the short term. After all, various global risks look likely to take their toll on equities. Nevertheless, legendary stock-picker Buffett has often urged investors to be greedy when others are fearful. That way, you can benefit from hoovering up shares at discounted prices. Not to mention the prospect of realising a tidy profit as investor sentiment improves over the years.
So, having established that buying cheap UK shares is a neat investment strategy, let’s take a look at how to spot them.
Buying cheap UK shares the Warren Buffett way
When on the lookout for the best cheap shares, it’s important not to invest in a company simply because its valuation has plunged. This can be a fatal mistake, even resulting in you potentially losing your entire investment if the company’s share price still has further to fall.
The key thing is to invest in companies that are undervalued. This often means that a firm’s shares have been oversold during a market crash and consequently, are trading for less than their intrinsic value. Admittedly, spotting such companies is hard. But there are a few key factors to keep in mind that should help you locate them.
Analysing metrics such as a company’s price-to-earnings ratio (and comparing it to others in the industry) is a helpful way of spotting potentially undervalued shares. Additionally, the price-to-book ratio can be used to assess the company’s market price against its book value. Most importantly however, investors should be satisfied with the quality of the underlying business they’re buying into.
Making a million the Warren Buffett way
Once you’ve invested in a handful of cheap UK shares, it’s time to follow Buffett’s advice again and wait patiently. This enables the process of compounding returns to take effect, which is vital to growing a large sum.
To illustrate, imagine you invest £500 monthly and manage to achieve an average yearly return of 8%. After 35 years, your investment pot would be worth £1,078,202.