After a bullish start to the previous week for UK shares, investor sentiment deteriorated on Friday, with the FTSE 100 index pulling back some of its gains. What’s more, unlike its American counterpart, the blue-chip UK index has struggled to recover its pre-crash valuation.
While the S&P 500 has added 3% to its value since the beginning of 2020, the FTSE 100 still sits 20% down on the year. As such, there could be an ideal buying opportunity here for those looking to follow Warren Buffett’s advice and hoover up high-quality stocks while they’re dirt-cheap.
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Warren Buffett’s advice
Buying shares while they’re trading on cheap valuations is a tried and tested method of building a tidy investment portfolio in the long run. Just look at Buffett’s success. He’s made billions from targeting undervalued companies that have fallen out of favour with investors. Many of these businesses have consequently gone on to thrive in improved market conditions, allowing Buffett to achieve market-beating returns over the long term.
However, it can be easier said than done. Holding for the long term can be a painful game to play, especially during stock market downturns. But given that Buffett’s favourite holding period is ‘forever’, I think investors would do well to follow his advice. Why? Because having a long-term outlook enables you to ride out the temporary market downswings and also fuels the compounding process, which is key to realising bumper returns.
Cheap UK shares
In spite of the FTSE 100’s rebound, a handful of UK shares still look dirt-cheap in my eyes. Consequently, I’m focusing on companies whose shares are trading well below their average historic valuations. This offers a wide margin of safety as it suggests the company is trading for less than its intrinsic value.
With the UK officially falling into the worst recession on record, trading conditions are likely to remain poor for the foreseeable future. For this reason, I’d limit my investments to companies with healthy balance sheets and strong liquidity. Such companies are often better positioned to weather the storm amidst such bleak economic conditions and still maintain a resilient financial performance.
Building a six-figure portfolio
To make a million the Warren Buffett way, you’ll need to prioritise a few things. Firstly, reinvesting your profits and dividends, which is vital in helping your portfolio swell in size dramatically. Secondly, don’t miss out on buying opportunities, such as the one presented by the 2020 stock market crash. Finally, be patient. As the saying goes, time in the market beats timing the market.
To illustrate, let’s say you invest £500 a month in a selection of diversified UK shares. Assuming an annual return of 8%, your investment pot would be worth £1,078,202 after 35 years! With that in mind, I’d follow Warren Buffett’s advice and buy undervalued shares today. After all, it could be your path to building serious wealth over the long term.
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Matthew Dumigan has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.