Warren Buffett has a long and successful track record when it comes to generating high returns from investing in the stock market.

One of the key reasons for his success could be his focus on buying companies with wide economic moats. In fact, this is one of his key tenets of investing and forms a large part of his investment strategy.

By adopting a similar approach, it may be possible to reduce risk and generate high returns over the long run.

Warren Buffett's focus on economic moats

When buying a company, Warren Buffett has historically looked for businesses with a competitive advantage over their peers. He terms this an 'economic moat'.

An economic moat is clearly very subjective. One investor may have a different viewpoint than another on whether a specific company enjoys a competitive advantage over its peers.

However, it often includes those companies which enjoy strong brand loyalty that means their customer base is more likely to stick with their products. Or, it could be a business that has a unique product that sets it apart from rivals.

Similarly, a business with a lower cost base than its rivals may be able to generate higher profitability in the long run.

Of course, Warren Buffett has many years of experience in identifying companies with wide economic moats.

However, by comparing the financial performance of companies, their track records in a variety of operating conditions and contrasting their business models, an investor may gain an insight into whether they have a competitive advantage over peers.

Economic moats and risk/reward opportunities

Warren Buffett's focus on economic moats could increase his return potential. For example, a business with a loyal customer base may be able to charge higher prices for its goods.

Similarly, lower costs or a unique product may equate to higher margins. Over time, they can allow a company to command a higher valuation and rising share price.

Meanwhile, companies with economic moats may also offer less risk than their peers. For example, they may enjoy more robust demand during periods of weaker operating conditions. This may help to support their bottom lines and could make them more financially sound than their peers.

This point may be especially relevant amidst current economic difficulties that may persist beyond the short run.

Buying stocks with competitive advantages today

Due to the uncertain economic outlook, it may be more difficult than usual to follow Warren Buffett's strategy of focusing on companies with economic moats. It remains unclear which sectors and companies will prosper in what could be a very different economy post-coronavirus.

As such, building a diverse portfolio could be more important than ever. In doing so, an investor can maximise their returns and limit risk over the coming years.

The post I'd listen to Warren Buffett and invest in stocks with wide economic moats appeared first on The Motley Fool Australia.

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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. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

Warren Buffett and Charlie Munger are two of the most successful and revered investors of all time. They have delivered market-beating returns on a consistent basis over a long period of time.

Although following their strategies may not guarantee high returns, it could have a positive impact on an investor's portfolio in the long run.

As such, by focusing on industries that an investor understands, looking beyond short-term market movements and holding some cash, it may be possible to earn relatively attractive returns from equities.

Warren Buffett and Charlie Munger's limited knowledge

Despite their track record of high returns, Warren Buffett and Charlie Munger do not invest in every industry available to them. In fact, many of their most successful investments over the years have been in the consumer goods and banking sectors. They have often overlooked technology businesses, as well as other sectors that many investors have profited from.

The main reason for this is that Buffett and Munger prefer to focus their capital on sectors that they fully understand and where they may have a competitive advantage versus other investors.

This may reduce the risk of their investments since they fully comprehend the potential threats that may be ahead. Similarly, it may mean higher return potential because they are able to identify the most appealing investments in an industry at a given point in time.

Although following a similar approach means that an investor may miss out on some attractive buying opportunities, the success of Warren Buffett and Charlie Munger shows that investors do not necessarily need to be experts in all industries to outperform the stock market.

Looking beyond short-term market movements

Warren Buffett and Charlie Munger also look beyond short-term market movements when investing. This allows them to avoid becoming too fearful in a market downturn, enabling them to buy stocks when other investors are selling them.

Equally, in a bull market, they rarely become excited about a stock market rally. This helps them avoid overpaying for shares when other investors allow their optimism to cloud their judgment.

By taking a long-term view, it is possible to capitalise on the stock market cycle more easily. It shows that gains and losses for the market have never previously lasted in perpetuity. By understanding this cycle and seeking to profit from it, it may be possible to earn higher returns in the long run.

Holding cash

Warren Buffett and Charlie Munger also hold relatively large amounts of cash at all times. They do not rely on its returns but rather use it to be able to respond quickly to short-term market movements that can create temporary buying opportunities. Holding some cash may also provide peace of mind during uncertain periods.

As the 2020 market crash showed, stock markets can recover quickly from their downturns. By being able to react quickly, it may be easier to take advantage of short-term mispricings.

The post I'd use these steps from the Warren Buffett/Charlie Munger method today appeared first on The Motley Fool Australia.

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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. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

A strategy of buying dirt-cheap shares and holding them for the long-run has been relatively successful in the past.

After all, it allows an investor to take advantage of the market cycle by buying undervalued shares in uncertain periods and holding them through long-term recovery.

Of course, such a scenario is by no means guaranteed. Some cheap stocks may fail to bounce back from their present woes.

However, a likely economic recovery and low share prices for some high-quality businesses suggest that now could be a sound moment to buy a diverse range of undervalued stocks.

High-quality companies with dirt-cheap shares

Some dirt-cheap shares deserve their low prices at the present time. For example, they may have strategies that cannot be easily adapted to a rapidly-changing world economy. Or, they could have weak financial positions that do not allow them to invest where necessary to become more competitive.

However, in other cases, today's cheap stocks could offer good value for money. Certainly, some companies face challenging futures caused by economic woes.

However, they may have access to large amounts of liquidity to strengthen their financial prospects. Equally, they could have a long track record of recovering from similar scenarios. Therefore, their valuations may not fully reflect their capacity to deliver improving financial performances in the coming years.

A track record of recovery

Predicting how dirt-cheap shares will perform in future is extremely challenging. After all, the future is always a known unknown. However, the past performance of the economy suggests that improving operating conditions are likely to be ahead.

After all, no economic downturn has ever lasted in perpetuity. This suggests that many of today's cheap stocks could enjoy higher demand for their products and services in future.

Moreover, the scale of monetary policy stimulus announced during the coronavirus pandemic indicates that a brighter economic outlook could be ahead.

As vaccine rollouts continue and lockdowns fade, consumer spending and economic growth could react positively. This may mean that many of today's dirt-cheap shares may benefit from a return to normality over the coming months and years.

Buying undervalued shares

Clearly, not all dirt-cheap shares will recover from their low price levels. Therefore, it is important to be selective about the companies that are added to a portfolio.

This can mean avoiding those businesses that have less financial stability, or that operate in industries that may become increasingly obsolete in the coming years.

While a stock market rally may have taken place, not all companies have surged in price over recent months.

Through buying cheaper businesses and holding them for the long run, it may be possible to enjoy greater scope for capital returns as a likely economic recovery replaces recent difficulties to provide improved operating conditions.

The post Why I'd buy dirt-cheap shares now and aim to hold them for a decade appeared first on The Motley Fool Australia.

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• Buy, hold, sell: Aurizon, Car Group, Guzman y Gomez shares

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. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

This allows his holdings to deliver on their growth potential. It also means that he does not become overly excited following periods of impressive capital returns.

This approach may be especially useful in today's stock market environment. The recent rally makes it easier to become overly confident in the prospects for equity markets, which may lead to poor decision-making.

Warren Buffett's long-term focus

Many of Warren Buffett's major portfolio holdings have been present for decades, rather than years.

In that time, they have often delivered strategy changes and capitalised on growth opportunities that are simply not possible to achieve in a matter of months. By allowing them the time they need to produce improving returns and higher profitability, Buffett has been able to enjoy higher returns than may have been possible if he had adopted a short time horizon.

This point is especially relevant right now. Many investors may have enjoyed strong returns from their portfolio holdings in recent months.

The stock market has experienced a rally that has pushed it to a new record high on a global basis. While it may now be tempting to sell stocks that have produced strong returns, and to buy others in their place, providing them with the time they need to deliver on their strategies could be a more logical approach.

Buffett's investment fundamentals

Of course, Warren Buffett's value investing approach means that he is likely to sell a stock if it becomes overpriced. Similarly, if there are other more attractive opportunities available then it can be worth offloading a stock to generate sufficient capital to take advantage of it. Therefore, a long-term approach may not always be the right move.

However, selling stocks because they have risen quickly in price over a short time period may not be a prudent move. It can lead to an investor missing out on future gains – especially since global economic forecasts are generally positive at the present time.

And, since the world economy has always recovered from its declines to post impressive turnarounds, there may be further opportunities for capital gains in the coming years.

A simple strategy

Clearly, Warren Buffett's long-term approach may not prove to be the right one for every investor. As 2020 showed, a stock market crash can take place at any time and can wipe large profits from existing holdings.

However, through having a long-term viewpoint, it may be easier to spot potential mispricings among high-quality stocks. It may also provide greater scope to benefit from the impact of compounding in a likely period of long-term economic growth over the coming years.

As such, sticking with high-quality companies even after potential recent gains could be a shrewd move.

The post Why I'd follow this piece of Warren Buffett advice today appeared first on The Motley Fool Australia.

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• Buy, hold, sell: Aurizon, Car Group, Guzman y Gomez shares

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. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

Despite the recent stock market rally, buying shares to make a passive income could be a logical strategy.

In many cases, they offer high dividend yields versus other assets. They may also be able to deliver dividend growth, as well as capital growth, as the world economy likely recovers from its present woes.

As such, now could be the right time to buy a diverse range of income shares and hold them over the long run.

A generous passive income from shares

Even though many shares now trade at significantly higher prices than they did following the 2020 market crash, a number of companies offer high yields relative to other assets.

Certainly, a low-interest rate environment makes this task easier for equities. However, some stocks have dividend yields at the present time that are higher than their historic averages. This suggests that they could offer an attractive income stream over the long run.

Of course, there is never any guarantee that a company will maintain recent dividend payouts in future. A whole host of challenges can crop up that causes them to reduce or even cancel shareholder payouts.

However, by purchasing a wide range of dividend shares with high yields, it may be possible to build a resilient and generous passive income stream at the present time.

Dividend growth opportunities

As well as high yields, a number of shares could offer a growing passive income in the coming years. The world economy has always recovered from its declines to post positive growth in the past. Although the same outcome can never be assumed, the scale of monetary policy stimulus already announced suggests that a return to growth is likely to be ahead.

Through buying companies with affordable dividends and the potential to deliver rising profitability in the coming years, it is possible to obtain a growing income return.

This may become increasingly important over time since low interest rates and quantitative easing in some major economies could spark a period of higher inflation in the long run.

Capital growth opportunities

As well as the potential for a high and growing passive income, dividend shares could deliver capital growth in the coming years. They could experience high demand as a result of limited opportunities to make a worthwhile income in other mainstream assets. This may drive their prices higher.

Furthermore, a high yield can indicate that a stock offers good value for money and a wide margin of safety. Buying undervalued shares has been a relatively sound means of capitalising on the stock market's long-term growth potential.

As such, now may be the right time to buy dividend shares, since they could produce higher total returns than the wider stock market over the long run.

The post Stock market rally: Why I'd invest in shares to make a passive income appeared first on The Motley Fool Australia.

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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. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

A stock market bubble is by no means a new phenomenon. Looking back at the track record of global equity markets shows that there has always been a cycle that includes periods of growth and periods of decline.

The recent stock market rally could cause investors to consider whether a crash is now imminent. However, such events can be very difficult to predict.

As such, a strategy that aims to buy undervalued shares for the long run where they are available could be a logical approach. It may allow for strong growth in the long run, as well as some relative protection from a potential market crash.

Predicting if a stock market bubble will burst

Despite the recent stock market rally, identifying a stock market bubble that is ready to burst can be a challenging task. After all, there appear to be some companies that continue to trade at low prices even after the recent recovery.

For example, sectors such as financial services, retail and resources could contain companies that have low valuations as a result of weak investor sentiment and an uncertain economic outlook. This could mean there are still buying opportunities on offer.

Furthermore, the stock market's performance is very difficult to accurately predict. Certainly, it has a long track record of delivering high single-digit annual total returns.

However, those returns are very unlikely to be linear. They include periods of growth and decline that themselves are dependent on a wide spectrum of factors that are tough to forecast on a consistent basis. This could mean that a stock market bubble increases in size, or bursts, in future.

A logical approach after a stock market rally

Given the difficulties in predicting whether a stock market bubble will burst or not, it may be prudent to instead focus on purchasing undervalued shares. They may offer a combination of low prices and high-quality fundamentals, such as strong balance sheets and resilient cash flow.

Not only may they be less impacted by a stock market crash because they are priced at low levels, but they could also outperform their sector peers in a bull market or bear market.

For example, a high-quality business with a wide economic moat may have more resilient sales in a downturn. Equally, it may be able to generate higher margins and profit growth that is reflected in a faster-rising share price during a period of stock market gains.

A long-term view

Clearly, no company is guaranteed to escape the bursting of a stock market bubble. Falling share prices can lead to deteriorating investor sentiment that pulls down even the most attractive stocks.

However, stronger businesses purchased at appealing prices can be a sound means of generating impressive total returns. When held for the long run, they could offer relatively strong performance compared to sector peers and the wider stock market.

The post Stock market rally: Is the stock market bubble set to burst? appeared first on The Motley Fool Australia.

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• Buy, hold, sell: Aurizon, Car Group, Guzman y Gomez shares

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. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. 

The stock market rally following the 2020 market crash has caused many shares to trade at significantly higher prices. Despite this, it is still possible to purchase cheap dividend stocks in order to obtain a generous passive income and the potential for capital growth.

Through focusing on their quality and future prospects, an investor can realistically build an attractive portfolio of income shares. On a relative basis, it could deliver high returns in a low interest rate environment.

Cheap dividend stocks may still be available

While the recent stock market rally has pushed many share valuations to higher levels, some sectors remain modestly valued in comparison. Within them, it may be possible to buy cheap dividend stocks, since bullish investors may have turned their attention to other industries that apparently offer higher growth rates at the present time.

For example, a number of strong businesses in the retail and consumer goods sectors appear to have bright long-term outlooks.

Moreover, they seem to have the financial means to overcome future risks from a challenging economic outlook to produce a rising dividend payout for investors. Due to weak investor sentiment at the present time, they could offer the potential to generate impressive total returns in the coming years.

Focusing on the quality of income shares

Of course, not every cheap dividend stock could be worth buying at the present time. The world economy has experienced one of its biggest ever shocks in recent months.

As such, high dividends from previous years may fail to be paid in future. Similarly, some companies may struggle to survive difficult operating conditions should they have large debts or weak cash flow.

Therefore, it is important to check the quality of any stock before buying it. This can mean taking steps such as reading its latest investor updates, assessing its strategy, and analysing recent annual reports.

Doing so allows an investor to build a picture of the company in question so they avoid potentially unattractive investments. Moreover, they may be able to find the strongest businesses that trade at the lowest prices. They could prove to be the most appealing cheap dividend stocks to buy at the present time.

Considering the relative appeal of dividend shares

While cheap dividend stocks may be less prevalent than they were several months ago due to the stock market rally, their relative appeal appears to be high. The world is currently operating in a low interest rate environment that could persist for a number of months or even years.

Therefore, relying on other income-producing assets to generate a passive income may prove to be a disappointing move. By contrast, the return potential from dividend shares that trade at low prices could be highly attractive from a long-term standpoint.

The post Stock market rally: is it too late to buy and hold cheap dividend stocks? appeared first on The Motley Fool Australia.

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• Buy, hold, sell: Aurizon, Car Group, Guzman y Gomez shares

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. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

With interest rates at low levels, the stock market having experienced a rally in recent months, and the economic outlook being uncertain, making a passive income may seem to be an uphill struggle.

However, a number of income shares continue to offer attractive yields. They may also deliver rising dividend payouts over the coming years.

As such, now could be the right time to buy a diverse range of dividend stocks. Over the long run, they could produce a generous income return on a relative basis.

Challenges when obtaining a passive income

Many investors may be tempted to turn to dividend shares at the present time to make a passive income. After all, low interest rates available on other assets may push them towards equity markets.

The problem, though, is that the recent stock market rally has caused many shares to have lower yields than a handful of months ago. When coupled with an uncertain economic outlook that could have a negative impact on shareholder payout growth rates, the outlook for dividend investors may seem to be somewhat downbeat.

Focusing on overlooked dividend shares

Despite these factors, a number of companies continue to offer relatively high yields at the present time. Certainly, there has been a stock market rally. But not all sectors or companies have risen in line with the wider market.

Some industries and businesses continue to be overlooked by investors, perhaps due to more modest earnings growth rates in a bull market, which could mean they offer good value for money.

Buying such businesses may be a sound move for passive income investors. They may be able to buy solid dividend-paying stocks that are able to grow their shareholder payouts in the coming years. Such companies may be unpopular because they have a less exciting business model than other shares that have failed to engage investors to the same extent.

Diversifying to build an income portfolio

As mentioned, an uncertain economic outlook is likely to remain a risk facing passive income investors in the coming months and years. Even the most appealing dividend shares could experience financial difficulties.

Therefore, it is important to build a diverse portfolio that can offer a higher degree of resilience and a more robust income stream than a concentrated group of stocks. Doing so is a cheaper and simpler process than it has been in the past.

For example, regular investing services can reduce the cost of single share purchases so that commission represents a smaller proportion of a portfolio's size. This may make diversifying even easier for smaller investors.

Moreover, many companies have become increasingly diversified in terms of their geographical exposure. This may allow investors to buy domestically-listed businesses to generate a passive income that is dependent on the performance of the world economy.

This may result in a more robust income return that can benefit from strong growth rates in some regions over the coming years.

The post Is being a passive income investor becoming more difficult? appeared first on The Motley Fool Australia.

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• Why Macquarie's $321 million Shield problem is back in court
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• Buy, hold, sell: Aurizon, Car Group, Guzman y Gomez shares

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. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. 

Warren Buffett has a long track record of buying undervalued shares. In doing so, he has been able to use the market cycle to his advantage. Over time, this has contributed to him outperforming the wider stock market over the long term.

Even after the recent stock market rally, there could be opportunities to buy undervalued stocks. They may offer greater scope for capital growth in a stock market rise, as well as more stable performance should there be another stock market crash in future.

Warren Buffett's focus on undervalued shares

As a value investor, Warren Buffett has always sought to buy undervalued shares. This does not necessarily mean that he purchases companies trading at cheap prices. Instead, he aims to buy a high-quality business for less than he believes it is worth. Sometimes, this can mean paying a higher price than sector peers are currently trading at. However, should the company in question have attributes such as a wide economic moat, Buffett has often purchased it in the past.

The result of this strategy has been very successful for Buffett. He has outperformed the wider stock market over a period of many years. Following a similar strategy could be worthwhile, since it may allow an investor to generate relatively high returns. After all, a stock that is priced for less than it is worth may be able to deliver stronger capital gains versus fairly priced or overpriced shares.

The potential for a stock market crash

Warren Buffett's strategy of buying undervalued shares could also be appealing due to the potential for a stock market crash. Predicting when this will occur may be challenging. However, through buying companies that do not trade on excessively high valuations, it may be possible to outperform the wider market in a downturn.

Clearly, this does not mean that losses will be avoided. After all, no stock is guaranteed to produce positive returns over any time period – even if it seems to be undervalued when bought. However, it can mean that an investor's portfolio which is focused on undervalued shares is less negatively impacted by weak investor sentiment and falling stock prices. Such companies may already trade at discounts to their intrinsic values, while overpriced shares decline to their real worth.

Opportunities to buy undervalued shares today

There may be opportunities to follow Warren Buffett's strategy in today's stock market. A number of stocks and sectors are yet to fully recover from the 2020 stock market crash.

Certainly, some industries are trading at high prices and global stock markets have hit record highs of late. However, sectors such as retail and consumer goods could contain undervalued shares that represent buying opportunities. Through capitalising on them, it may be possible to earn attractive total returns in the coming years.

The post I'd listen to Warren Buffett's advice to buy undervalued shares today appeared first on The Motley Fool Australia.

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• Why Macquarie's $321 million Shield problem is back in court
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• Buy, hold, sell: Aurizon, Car Group, Guzman y Gomez shares

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. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

Through buying a diverse range of them, it is possible to build a portfolio that can deliver attractive returns over the long run. With many opportunities to buy undervalued shares still available despite the recent stock market rally, now may be the right time to start the process of capitalising on today's top stocks.

Defining which companies are top shares

Businesses with competitive advantages over their peers may be more likely to be classed as top shares. For example, they may have a unique product that means they can generate higher margins than their rivals. Or, they could have a lower cost base and stronger brand loyalty that lifts their financial performance over the long run.

Similarly, the most appealing shares may be those companies with solid balance sheets and strong cash flow. This point may be especially relevant at the present time, since the outlook for the economy continues to be very uncertain. Financially-sound businesses may be better able to overcome threats to economic growth caused by the coronavirus pandemic.

Meanwhile, top shares may be those companies that have all of the above attributes, but yet trade at low prices. Their low valuations may, for example, be caused by weaker recent performance that can be reversed over the long run. Or, investor sentiment towards their sector could be downbeat. This may present an opportunity to buy high-quality companies trading at low prices.

Building a portfolio of attractive stocks

Once top shares have been identified, building a portfolio of them can be a challenging task. After all, it is tempting to simply focus on a small number of the best ideas that are available at a given point in time. However, this may lead to high company-specific risk that means an investor is very reliant on a small number of holdings for their returns. Through buying a wider range of businesses, it may be possible to reduce overall risks.

Furthermore, holding some cash in case of a stock market crash can be a shrewd move. This does not mean that an investor relies on savings accounts for their returns. Rather, they have a limited amount of cash available so they can add more stocks to their portfolio should appealing opportunities come along in future. This may mean lower returns in the short run, but can provide greater opportunity to capitalise on the stock market cycle when seeking to buy top stocks.

Taking a long-term view

As ever, even top shares can experience periods of disappointment. Therefore, it is important to take a long-term view of any portfolio that contains equities. The track record of the global stock market shows that it can deliver attractive returns relative to other mainstream assets.

The post How I'd build a portfolio by investing in top shares now appeared first on The Motley Fool Australia.

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• Why Macquarie's $321 million Shield problem is back in court
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• Buy, hold, sell: Aurizon, Car Group, Guzman y Gomez shares

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. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

Every investor will have a different approach when seeking to build a 'best stocks to buy now' list.

However, it could be focused on the quality of a business, as well as its price. This may enable an investor to buy the most attractive companies while they trade at prices that undervalue their long-term prospects.

Through focusing on a wide range of sectors, it may be possible to unearth a diverse range of companies. This could limit risk in what remains an uncertain economic environment.

High-quality companies may be among the best stocks to buy now

Companies with solid financial positions and competitive advantages may feature on a 'best stocks to buy now' list. This does not guarantee their investment success. However, they may be able to more easily overcome challenging operating conditions such as those currently in place for many companies. Similarly, they could deliver higher profitability in the long run because of their capacity to invest in new growth areas and rely on a loyal customer base.

Identifying such companies is very subjective. However, by assessing their annual reports and latest investor updates it may be possible to find them within a specific sector. Comparing them versus sector peers may also make it clearer as to which companies have a more attractive growth outlook in a potential economic recovery over the coming years.

Buying undervalued shares

Companies that offer good value for money may be among the best stocks to buy now. Even if an investor is able to unearth a very high-quality business, paying too much for it can lead to disappointing returns. Such a company could lack a margin of safety, which may indicate that investors have already factored in its future earnings potential.

Clearly, there are various methods to analyse companies. Different ones can be more relevant to different sectors. For example, the price-to-book (P/B) ratio may be more relevant for banks and real estate investment trusts (REITs), while the price-to-earnings (P/E) ratio may be more useful when comparing consumer goods businesses. Comparing a company's valuation to its long-term average and its sector peers may provide guidance as to whether it offers good value for money at the present time.

Searching in a wide range of sectors

It may be prudent to search for the best stocks to buy now in a wide range of sectors. Otherwise, an investor may be limiting their choice to a small number of businesses that leads to higher risks because of a greater reliance on a concentrated range of industries.

A diverse portfolio may also be able to offer greater returns in the coming years. It may allow an investor to capitalise on a broader range of growth opportunities that are lacking in a concentrated portfolio. Although a diverse portfolio never guarantees positive investment returns, it may create a more favourable risk/reward opportunity for a long-term investor.

The post How I'd build a 'best stocks to buy now' list appeared first on The Motley Fool Australia.

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• Why Macquarie's $321 million Shield problem is back in court
• ASX shares investors are still buying despite volatility: survey
• Buy, hold, sell: Aurizon, Car Group, Guzman y Gomez shares

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. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

Generating a growing passive income from dividend shares is a realistic goal for most investors.

Buying companies that have affordable dividend payouts as a proportion of profit could indicate they have the scope to raise shareholder payments. Similarly, stocks with impressive profit forecasts may be able to raise their dividends at a relatively fast pace.

Through buying a diverse range of such companies, it could be possible to build a strong income portfolio in a low-interest-rate environment.

Buying shares with low payout ratios

A company's dividend payout ratio can provide guidance on its passive income prospects. The ratio is calculated by dividing dividends paid in the most recent financial year by net profit from the same year. The result is a percentage figure. A figure below 100% shows that the company had headroom when making its most recent dividend payments out of net profit.

Clearly, company profitability can change – especially in the current economic environment. However, businesses with low payout ratios may find it easier to grow their dividends at a fast pace than those companies that have higher payout ratios. They may be less reliant on rising profits to fund dividend growth. As such, they could be a more promising means of obtaining a rising passive income in the coming years.

Earnings growth can catalyse a company's passive income

Companies that have attractive earnings growth prospects may also offer a higher chance of providing a rising passive income. For example, two companies with the same payout ratios may have very different financial outlooks due to industry conditions and their strategies. The stock with a more upbeat operating outlook may find it easier to raise dividends without compromising the affordability of its shareholder payouts.

Of course, assessing the profit potential of any business is a known unknown. It's especially difficult at the present time to judge whether a company has the scope to raise profitability. However, by focusing on the track record of profit growth for a specific stock versus its peers, it may be possible to deduce whether it has a competitive advantage. This may indicate that it is able to offer more resilient sales growth, higher margins and a rising passive income in the long run.

Buying dividend shares today

The uncertain economic outlook makes it more important than ever to diversify among a range of dividend shares when seeking to make a passive income. Otherwise, an investor may be too reliant on a small number of holdings for their income.

Even after the stock market's rally since the 2020 stock market crash, a number of companies appear to be trading on low valuations given their long-term dividend prospects. As such, there seem to be opportunities to build a diverse income portfolio that can provide strong growth in a low-interest-rate environment.

The post How I'd aim to generate a growing passive income from dividend shares appeared first on The Motley Fool Australia.

More reading

• 6 ASX 200 shares boosted by brokers this week
• South32 shares fall 10% from all-time high: Is the rally over?
• Why Macquarie's $321 million Shield problem is back in court
• ASX shares investors are still buying despite volatility: survey
• Buy, hold, sell: Aurizon, Car Group, Guzman y Gomez shares

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. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

Buying dividend stocks to make a passive income can be a worthwhile move. It may allow an investor to generate significantly higher returns than those available from other income-producing assets.

However, shares are much riskier than assets such as bonds. There is always scope to lose money on them over any time period. Therefore, by avoiding these three common mistakes, it may be possible to reduce risks, improve returns and enjoy a growing income stream over the long run.

Accessing an affordable passive income

A common mistake made by passive income investors is failing to check the reliability of a company's dividend. It is all too easy to become focused on yields and how much a dividend could potentially grow by in future. As such, analysing a company's dividend in terms of its affordability can easily be overlooked – especially during a bull market when many investors are upbeat about the future prospects for the stock market.

Assessing a company's dividend affordability can be undertaken by comparing its shareholder payouts to cash flow or net profit. This provides guidance on how many times it was able to pay its dividend. A figure of less than one is clearly a red flag, since it means a company's profits were insufficient to make dividend payouts. However, investors may wish to demand a figure of more than one at the present time due to the uncertain economic outlook.

Building a concentrated portfolio

Obtaining a passive income from shares is a risky pursuit. Any company can experience tough operating conditions at any time. This can compromise its capacity to pay a dividend.

Therefore, it is important to avoid building a concentrated portfolio of stocks. Many investors hold too few companies in their portfolios because they do not wish to dilute their overall yield by purchasing businesses with lower yields. However, this can be a dangerous move, since it means they are reliant on a relatively small number of companies through which to generate an income over the long run.

Forgetting about everything else

It is easy to have tunnel vision when seeking to make a passive income from dividend shares. In other words, investors sometimes forget about everything other than a company's income prospects. For example, they may fail to check its valuation, the strength of its balance sheet, or a variety of other factors that matter to its future performance.

Of course, dividends are likely to be most important to an income-seeking investor when buying dividend shares. However, it is imperative to check all aspects of a business in order to build an accurate picture of its strengths and weaknesses. Through undertaking this process, it may be possible to obtain a higher income stream that is more resilient in the coming years.

The post 3 mistakes passive income investors can make when investing in dividend stocks appeared first on The Motley Fool Australia.

More reading

• 6 ASX 200 shares boosted by brokers this week
• South32 shares fall 10% from all-time high: Is the rally over?
• Why Macquarie's $321 million Shield problem is back in court
• ASX shares investors are still buying despite volatility: survey
• Buy, hold, sell: Aurizon, Car Group, Guzman y Gomez shares

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. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

Despite the recent stock market rally, it may still be possible to unearth under-the-radar pandemic bargains. After all, a number of companies and sectors continue to be unpopular among investors due to their uncertain outlooks.

Through focusing on the quality of companies and comparing their valuations to those of sector peers, it may be possible to find attractive investment opportunities. Over time, they could deliver impressive returns in a potential long-term stock market recovery.

Defining under-the-radar pandemic bargains

Of course, different investors will have differing views on which stocks can be classed as under-the-radar pandemic bargains. However, they could include those companies that have solid fundamentals, including a sound balance sheet, but trade at low prices compared to their sector peers.

For example, a clothing retailer may currently be struggling to generate rising sales because of lockdown restrictions. Consumers may be avoiding spending on clothing because of a lack of opportunities for social interaction. This could mean a challenging financial outlook for the company in question. However, if it has a solid financial position that means it can survive and a wide economic moat, it could deliver a significant improvement in profitability as the pandemic subsides.

Furthermore, investors may have factored in many of the challenges faced by such businesses. This could mean that they offer wide margins of safety that make them under-the-radar pandemic bargains at the present time when purchased on a long-term view.

Searching for bargain stocks in unpopular sectors

Some sectors may be more likely to contain under-the-radar pandemic bargains than others. For example, the travel & leisure industry currently faces a very challenging outlook due in part to the impact of coronavirus. This may have caused many businesses to trade at low prices, since investor sentiment could be weak.

Where they have strong customer loyalty and sufficient liquidity to overcome present challenges, they could offer investment appeal. By comparing their current valuations to their historic averages, as well as to those of sector peers with similar business models, it may be possible to unearth the most attractive buying opportunities. While their share prices may remain unpopular for some time, they could offer strong recovery potential over the long run.

Building a portfolio

Clearly, under-the-radar pandemic bargains could experience further challenges in future. As well as the prospect of ongoing risks associated with coronavirus, they may struggle to adapt to a fast pace of change in the world economy. Therefore, it is important to build a portfolio that contains a wide range of companies to reduce risk.

Through identifying sound businesses that may be undervalued by other investors, it may be possible to generate attractive long-term returns. Over time, this could have a positive impact on an investor's portfolio performance as the world economy experiences a likely recovery from what has been an extremely challenging 12-month period.

The post How I'd aim to find stocks that are under-the-radar pandemic bargains appeared first on The Motley Fool Australia.

More reading

• 6 ASX 200 shares boosted by brokers this week
• South32 shares fall 10% from all-time high: Is the rally over?
• Why Macquarie's $321 million Shield problem is back in court
• ASX shares investors are still buying despite volatility: survey
• Buy, hold, sell: Aurizon, Car Group, Guzman y Gomez shares

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. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

Many investors may naturally be drawn to the highest yielding dividend shares when seeking to make a passive income. After all, they offer the greatest potential income return on a relative basis.

However, it could be prudent to check their dividend affordability before buying them. While this does not guarantee that they will be able to make future dividend payouts, it can be a means of ruling out stocks that are clearly not able to afford their shareholder payouts.

Similarly, assessing the growth potential of a company's dividend can be a sound move. It may allow an investor to obtain a growing passive income in the long run.

Assessing affordability when buying dividend shares

The affordability of shareholder payouts can be assessed in a couple of different ways. For example, dividend shares can be analysed in this regard by comparing their net profits with shareholder payouts. A company that has a large amount of headroom when making dividend payments may be less likely to run into trouble when trying to pay them in future.

Meanwhile, an assessment of a company's wider financial situation can provide an insight into the affordability of its dividends. For example, considering its debt levels and interest cover, in terms of how many times it could service debt out of operating profit, may build a picture of its financial strength. Similarly, companies that have a long and reliable track record of dividend payouts may be less likely to cut them in future.

All of these factors, when combined, can provide an insight into the reliability of dividend shares. It may lead an investor to avoid the highest yielding stocks in favour of more reliable opportunities that have lower yields.

Dividend growth opportunities

As well as a high and reliable yield, buying dividend shares that can grow shareholder payouts at a fast pace could be a shrewd move. They may be able to deliver a rising passive income over the long run that has a more positive impact on an investor's financial situation compared to a high initial yield that fails to grow at a fast pace over the coming years.

Assessing the prospect of dividend growth is very subjective. It is closely tied to the financial performance of a business, in terms of how quickly its profitability can grow. Therefore, analysing its strategy, forecasts and competitive advantage could act as a guide, rather than a definitive answer, to the question of its dividend growth potential.

Despite the subjective nature of assessing the growth potential of dividend shares, the process can help an investor to avoid potentially unattractive stocks. Although this does not mean a complete avoidance of companies that may struggle to raise dividends in the coming years, it could improve an investor's risk/reward ratio so that they are more likely to enjoy a high and growing passive income in the long run.

The post Do the highest yielding dividend shares offer the best passive incomes? appeared first on The Motley Fool Australia.

More reading

• 6 ASX 200 shares boosted by brokers this week
• South32 shares fall 10% from all-time high: Is the rally over?
• Why Macquarie's $321 million Shield problem is back in court
• ASX shares investors are still buying despite volatility: survey
• Buy, hold, sell: Aurizon, Car Group, Guzman y Gomez shares

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. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

Even though the stock market has rallied since the 2020 market crash, the economic outlook remains very uncertain. Therefore, it could be prudent to seek dividend shares that offer defensive characteristics and a solid track record of paying shareholders a rising passive income.

Furthermore, buying dividend stocks that have improving outlooks could be a sound move. Successful growth strategies implemented by a business can make a very positive impact on the level of shareholder payouts over the long run.

Dividend shares with defensive characteristics

Dividend shares could offer an appealing means of generating a passive income in today's low-interest-rate environment. However, they can be significantly riskier than other income-producing assets – especially with the challenging outlook that remains in place for the world economy.

As such, buying dividend stocks that have defensive characteristics could be a sound move. It may mean that an investor's holdings have a greater chance of offering a rising passive income irrespective of economic conditions. This could mean searching for dividend stocks in sectors such as utilities and tobacco, where sales and profitability may be less impacted by the prospects for the economy than other industries.

A track record of dividend growth

Dividend shares that have strong track records of growing shareholder payouts could be relatively appealing. For example, they may have been able to grow, or at least maintain, their shareholder payouts in previous periods of economic turmoil. This could indicate that they have the capacity to adapt their strategies to evolving operating conditions.

The track records of dividend stocks can be easily accessed by searching their annual reports. They show detailed information of their previous payouts, as well as their reasoning behind specific strategy shifts. They could also provide guidance as to how a company has been able to evolve to meet changing consumer tastes, and how it plans to do so in future after what has been a very disruptive period for many industries.

An improving financial outlook

When searching for the most appealing dividend shares to buy today, it could be a good idea to check their growth strategies. This could provide an indication of the likelihood of them being able to increase profitability so they can afford a rising dividend in the coming years.

Clearly, assessing any company's financial outlook or strategy is very subjective. Even if its prospects seem to be bright, there is never any guarantee that they will produce rising profitability or a growing dividend.

However, through buying such companies, an investor may be able to increase their chances of holding successful businesses that make attractive dividend shares. A wide range of such companies in a diverse portfolio could lead to attractive income returns that grow at a relatively fast pace in the long run.

The post 3 steps I'd take to find top dividend shares to buy in March and beyond appeared first on The Motley Fool Australia.

More reading

• 6 ASX 200 shares boosted by brokers this week
• South32 shares fall 10% from all-time high: Is the rally over?
• Why Macquarie's $321 million Shield problem is back in court
• ASX shares investors are still buying despite volatility: survey
• Buy, hold, sell: Aurizon, Car Group, Guzman y Gomez shares

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. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

Finding top shares to buy in March 2021 could prove to be a tough process. The stock market has rallied after the 2020 market crash. As such, some companies may now appear to be overvalued based on their financial prospects.

However, it may still be possible to unearth top stocks that offer a mix of competitive advantages, solid finances and low valuations. Such companies could offer favourable long-term growth opportunities relative to other businesses.

Searching for top shares where other investors are not looking

A good place to start when searching for top shares could be unpopular sectors. Other investors may have disregarded them based on a variety of factors, including their uncertain prospects or a rapid pace of change that is taking place. This may provide opportunities to buy high-quality companies when they are trading at attractive prices.

Clearly, every investor will have their own version of what represents an attractive company. However, it could include those businesses that have solid financial positions and the capacity to adapt to a changing economic outlook. Through looking for such businesses where other investors are not spending much time doing likewise, it may be possible to unearth the most appealing buying opportunities following the stock market rally.

For example, investors may not be especially upbeat about the prospect of finding top shares in sectors such as financial services or energy at the present time. They face difficult operating conditions that could lead to losses for investors in what remains a precarious economic environment. However, by identifying the strongest businesses within such sectors, it may be possible to find undervalued companies within them.

Comparing stocks to their peers

Once a potential buying opportunity has been found, it may be a good idea to make a comparison with sector peers. This can provide a guide as to whether it among the top shares to buy today.

For example, two companies operating in the same sector may have similar valuations. However, one business could have a wider economic moat, such as a unique product or strong brand, that reduces its overall risks. Similarly, two stocks could have wildly different valuations – even though they have similar cost bases and revenue drivers. This may mean there is a misprising opportunity that can be exploited by investors.

Assessing a company's quality

Clearly, the future is always a known unknown. Even top shares that offer a mix of low prices and solid financial prospects can underperform the market. They may even fail to deliver a positive return in the coming years.

However, by taking the time to analyse specific sectors that may be unpopular at the present time, it may be possible to obtain a relatively attractive risk/reward ratio. Over time, this may lead to attractive portfolio returns.

The post How I'd aim to find top shares to buy in March 2021 appeared first on The Motley Fool Australia.

More reading

• 6 ASX 200 shares boosted by brokers this week
• South32 shares fall 10% from all-time high: Is the rally over?
• Why Macquarie's $321 million Shield problem is back in court
• ASX shares investors are still buying despite volatility: survey
• Buy, hold, sell: Aurizon, Car Group, Guzman y Gomez shares

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. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

As well as providing a generous passive income, dividend shares could deliver impressive capital growth in a stock market recovery.

Their high yields could become increasingly appealing to income investors with limited options among other mainstream assets. Furthermore, the low valuations of many income shares could mean they offer good value for money and significant scope for gains over the long run.

With a large proportion of the stock market's past total returns having been generated from the reinvestment of dividends, buying income shares could be a sound means of outperforming the index.

The increasing popularity of dividend shares

While dividend shares have always been a means of obtaining a passive income, today they could prove to be the best option by some distance for many investors. That's not only because many dividend stocks have high yields, but also because income returns available elsewhere are relatively low.

The loose monetary policies pursued over the past 10+ years, as well as falling interest rates across major economies following the 2020 market crash, mean that the returns on cash and bonds are extremely disappointing. For many people, they are too low to even consider when it comes to obtaining an income from their capital. As such, they may be pushed towards dividend stocks in order to generate a worthwhile passive income.

This situation may mean that demand for dividend shares increases over the coming years. Certainly, interest rates will rise at some point in future. However, that could be many months, or even many years, away. The result of this could be rising demand for income shares that pushes their prices higher.

Total return potential

As mentioned, many income shares appear to offer good value for money at the present time. Since the 2020 market crash, many investors have focused on growth stocks, rather than dividend shares. This could mean there is scope for large capital gains from a portfolio of income shares that enables them to outperform the wider stock market.

The historic returns of indexes such as the FTSE 100 Index (FTSE: UKX) shows that a large proportion of total returns have been derived from the reinvestment of dividends. As such, investors who do not need, or desire, an income in the short run could buy income stocks and reinvest the shareholder returns received. This may enable them to earn a relatively high return in the coming years.

Clearly, it is important to diversify across a wide range of dividend shares. Although many of them are solid businesses with sound financial positions, the uncertain outlook for the economy may hold back their performances in the short run. However, buying a range of them could produce higher returns, as well as lower risks, to benefit from a long-term stock market rally.

The post Why I'd buy dividend shares now to capitalise on the stock market recovery appeared first on The Motley Fool Australia.

More reading

• 6 ASX 200 shares boosted by brokers this week
• South32 shares fall 10% from all-time high: Is the rally over?
• Why Macquarie's $321 million Shield problem is back in court
• ASX shares investors are still buying despite volatility: survey
• Buy, hold, sell: Aurizon, Car Group, Guzman y Gomez shares

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. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

Warren Buffett has a long track record of using stock market crashes to his advantage. After all, his strategy centres on seeking to buy high-quality companies when they trade at low prices. Often, such a situation occurs when a market downturn has recently taken place.

Since the next stock market decline could occur at any time, being prepared for the next one could be a sound move. By holding some cash, it is possible to be ready to capitalise on lower stock prices that may only be available temporarily.

The next stock market crash may not be far away

Predicting when the next stock market crash will occur is extremely difficult. After all, it can be prompted by a large number of factors that themselves are tough to estimate. For example, the 2020 market decline was caused by coronavirus, the course of which very few investors were able to predict even once it began to take place.

Therefore, being in a position of constant preparedness for the next bear market could be a sound move. History suggests that no stock market rise ever lasts in perpetuity. This means that an investor who waits for the next market downturn may be able to use it to buy cheap shares, as Warren Buffett has done previously.

Holding cash as per Warren Buffett

Warren Buffett holds significant sums of cash at all times. This provides him with the means to invest at short notice should opportunities arise. Furthermore, it means he is liquid, in terms of having access to funds that can quickly be invested, in case there is a sudden resurgence in share prices. This took place following the 2020 stock market crash, when many share prices experienced a rally after their short-term declines.

Of course, holding cash could mean lower returns than the stock market offers during a period of growth. Low interest rates mean that it is now difficult to obtain an inflation-beating return in some areas. However, this could be offset by the chance to be ready for the next market downturn, when low share prices may provide scope for long-term capital gains.

Investing in solid businesses

As well as holding cash in preparation for the next stock market crash, analysing current holdings to make sure they are financially sound could be a shrewd move. For example, ensuring they have solid balance sheets and competitive advantages in a changing world economy may lead to less risk and higher returns.

Furthermore, holding stocks that have wide margins of safety could be a logical approach over the long run. When combined with having cash on hand in case a market downturn suddenly takes place, this may lead to less risk and higher returns in what may prove to be a volatile stock market over the coming years.

The post Why I'd follow Warren Buffett and hold cash after the 2020 stock market crash appeared first on The Motley Fool Australia.

More reading

• 6 ASX 200 shares boosted by brokers this week
• South32 shares fall 10% from all-time high: Is the rally over?
• Why Macquarie's $321 million Shield problem is back in court
• ASX shares investors are still buying despite volatility: survey
• Buy, hold, sell: Aurizon, Car Group, Guzman y Gomez shares

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. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. 

The new bull market has thrust many shares to record highs. However, it is still possible to buy cheap shares due to an uncertain outlook for the economy in the short run.

Buying stocks that trade at cheap prices has historically been a sound means of capitalising on stock market cycles.

Therefore, building a portfolio right now of high-quality businesses while they trade at low prices could be a means of generating high returns. It may even double an initial investment at a relatively fast pace over the coming years.

Buying cheap shares with capital growth potential

One of the major reasons to buy cheap shares is their capacity to deliver high returns. Buying any asset at a low price is likely to be a better idea than purchasing it at a higher price. There is more scope for capital growth, which equates to greater returns for an investor.

Even though the new bull market has pushed many stocks to new highs, some sectors and companies trade at cheap prices. In many cases, they are businesses that face challenging short-term prospects that could mean their financial performances disappoint. However, since the world economy has always recovered from periods of low growth to deliver an improving performance, the long-term prospects for many industries may be more positive than market sentiment suggests.

Focusing on quality companies at low prices

Of course, some cheap shares may be priced at low levels for good reason. For example, they may have weak balance sheets or lack an economic moat that means they fail to deliver strong profit growth in the long run.

As such, it is imperative to focus on the quality of any company before buying it. This means analysing its industry position, strategy and financial position through assessing its latest investor updates and annual reports. Otherwise, it is possible to end up with a portfolio filled with unattractive companies that may not be able to recover even in a long-term bull market. This could mean high risks, as well as low returns.

Doubling an investment in undervalued shares

Investing in cheap shares could be a means of generating higher returns than the wider stock market over the long run. It allows an investor to capitalise on the new bull market via companies for whom investors may currently have a negative standpoint that may not be merited in the coming years.

Even matching the returns of the stock market could lead to 100%+ returns in the coming years. For example, indices such as the FTSE 100 Index (FTSE: UKX) and S&P 500 Index (SP: .INX) have delivered annualised total returns of 8-10% in recent decades. This means that an investment that matches their performance could double within 7-9 years.

However, an investor may be able to reduce this timeframe by purchasing undervalued companies now. They could be among the top performers in the new bull market.

The post Why today's cheap shares could double my money during the new bull market appeared first on The Motley Fool Australia.

More reading

• 6 ASX 200 shares boosted by brokers this week
• South32 shares fall 10% from all-time high: Is the rally over?
• Why Macquarie's $321 million Shield problem is back in court
• ASX shares investors are still buying despite volatility: survey
• Buy, hold, sell: Aurizon, Car Group, Guzman y Gomez shares

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. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.