Deciding what strategy to use when investing can be difficult. After all, there are a huge range of investment styles that have proven popular and effective over the years.
The value investing strategy followed by Warren Buffett could be a worthwhile basis from which to manage your investments. It focuses on buying high-quality businesses while they trade at low prices.
Furthermore, by following Buffett’s advice to ‘buy a wonderful company at a fair price, rather than a fair company at a wonderful price’, you could improve your prospects of retiring early.
While value investing is often perceived to be based on buying the cheapest stocks available at a given time, the reality is somewhat different. Value investors such as Warren Buffett focus on the quality of a company, rather than on its price. They assess fundamental aspects of a business, such as its free cash flow, balance sheet strength and competitive advantage before considering what it may be worth. After all, the quality of a company impacts greatly on its intrinsic value.
Should a specific company be deemed strong enough to buy, Buffett and other value investors may not necessarily need to purchase it at a low price. They may be comfortable in paying a premium for it versus other stocks – as long as it trades at a discount to its intrinsic value. This provides them with a margin of safety in case their assessment of its future prospects proves to be incorrect.
Through focusing on quality companies, value investors may be able to reduce the risk of their portfolio. They may also enhance their return prospects over the long run.
At the present time, there appear to be numerous stocks that have bright futures. Industries such as banking and healthcare are undergoing rapid change, while the prospects of a greener economy may enhance the growth performance of companies that are able to successfully adapt to it.
Many of those high-quality companies are currently trading on low valuations. This may have been caused by uncertainties facing the world economy, such as Brexit and geopolitical risks in China, that have pushed investors into less risky assets. For value investors, this may mean there are wider margins of safety on offer at the present time than there have been for many months. As such, it may be possible to buy impressive companies at very fair prices.
Of course, value investing is not a ‘get rich quick’ scheme that will suddenly boost your retirement prospects. However, by focusing on the quality of a company first, and then its price, it may be possible to capitalise on the best opportunities in the stock market. In doing so, you could follow Warren Buffett’s blueprint and enhance your financial prospects.
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Motley Fool contributor Peter Stephens has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.