Are you looking to grow your wealth and beat the market with a $2,000 investment?
The ASX has been known for delivering solid returns over many decades. In fact, over the last 30 years, ASX shares have delivered an average total return of 9.6% per annum.
But how could you potentially outperform the market and turn your $2,000 into $10,000? The answer may lie in buying undervalued ASX shares, a strategy that has been championed by investing legends like Warren Buffett.
Buying cheap ASX shares
Investing in high-quality ASX shares when they are trading at a discount to their intrinsic value can be a game-changer.
For example, buying cheap ASX shares allows you to capitalise on the market's inefficiencies. Even in a world where information flows freely, ASX shares can often be mispriced due to various factors such as short-term market sentiment or investor overreactions. Treasury Wine Estates Ltd (ASX: TWE) could potentially be an example of this right now.
Investors like Warren Buffett have built their fortunes by identifying these mispriced companies and then holding onto them for the long term.
Secondly, undervalued shares provide a margin of safety. This means that even if the stock's price doesn't immediately rise, you've bought it at a significant enough discount that your downside risk is limited. This margin of safety can protect your capital during market downturns and turbulent economic times, making it a prudent strategy for risk-averse investors.
Finding value
So, how can you identify cheap ASX shares? You might be best starting by looking for strong and established companies with robust financials, competitive advantages, and reliable cash flows that have temporarily fallen out of favour due to short-term challenges.
This is something that Buffett has done to great effect. You only need to look at his net wealth to see this.
It is also important to maintain a long-term perspective when adopting this strategy. The true value of a company may not be immediately reflected in its share price, but with patience, the market may eventually recognise the underlying strength of the business, leading to a share price rebound.
Turning $2k into $10k
Once you have identified the cheap ASX shares you want to buy, then it's time to let compounding do its thing.
If you can find a way to beat the market's 9.6% average return by 2%, it would take you 15 years to quintuple your money to $10,000.
Though, it is worth remembering that beating the market is notoriously difficult and past performance is not a guarantee of future returns.
