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No savings at 40? I’d follow Warren Buffett’s tips and buy cheap shares to aim for a million

Happy couple showing relief at news
Happy couple showing relief at news

Warren Buffett is one of the most successful investors alive today. So it seems prudent in my mind to follow in his footsteps. And plenty of evidence has demonstrated that, in the long term, his investing style can lead to spectacular returns. In fact, even an investor starting from scratch at age 40, could still gain millionaire status.

That’s especially true today, with so many brilliant UK shares trading at dirt-cheap valuations, courtesy of the ongoing stock market correction. So how can investors tap into this opportunity to try and propel their wealth to new heights in the long run? Let’s explore.

How Buffett finds bargains

The most obvious place to start when searching for undervalued stocks is to look for the ones which have fallen the most. And with uncertainty plaguing the stock market in recent months, there’s no shortage of choice.

However, simply investing in all the beaten-down businesses investors can find is a recipe for disaster. There’s always a reason behind a plummeting stock price. And if that reason is the underlying company has become financially compromised, then buying its shares is the equivalent of setting money on fire.

So how can an investor separate the bargains from the duds?

There are a bunch of ratios an analyst can use to determine the financial health of a business. But Buffett goes one step beyond, explicitly looking for competitive advantages. These are unique traits that give a business the upper hand against its rivals and come in many different forms:

  • A technological edge protected by patents

  • A powerful brand that commands pricing power

  • A sticky product that creates switching costs for customers

This is far from a complete list. But focusing exclusively on high-quality shares with many advantages trading at cheap valuations is exactly how Buffett made his fortune.

Targeting a million with cheap shares

The stock market has experienced numerous downturns throughout history. But it’s still yielded an average historical return of around 11% when looking at the FTSE 250. And for investors who can successfully identify top-notch cheap stocks like Warren Buffett, this return can be boosted even higher.

Even if an investor manages to increase their average annual return to 12%, a £750 monthly investment at this rate would transform into a million within 23 years – just in time for retirement.

But as exciting as that sounds, there are, of course, no guarantees. And hitting this level of return consistently can be challenging. Poorly executed investment decisions could lead to a portfolio that underperforms the FTSE 250 and might even destroy wealth rather than create it. After all, we’ve seen in 2022 a glimpse of how volatile the stock market can be.

Crash and corrections will undoubtedly happen again in the future, so reaching millionaire status could take longer than 23 years.

But as Buffett has demonstrated, enduring these unpleasant temporary storms can unlock substantial wealth for patient investors.

The post No savings at 40? I’d follow Warren Buffett’s tips and buy cheap shares to aim for a million appeared first on The Motley Fool UK.

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Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2022