Warren Buffett has a long track record of generating high returns from buying cheap shares and holding them for the long run.
Despite the recent commencement of a new bull market, many UK shares continue to trade at low prices following the 2020 stock market crash.
As such, there may be buying opportunities available. Over time, they could produce impressive returns that improve an investor’s financial situation.
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Warren Buffett’s focus on cheap shares
Warren Buffett has always sought to buy shares at prices that undervalue their long-term prospects. In doing so, he obtains a relatively favourable risk/reward opportunity.
In terms of risks, a lower share price that undervalues a business generally means investors have factored in many of the threats it faces. This may mean there’s less scope for a share price decline should those risks come to fruition.
In terms of rewards, buying cheap shares provides greater scope for capital growth over the long run. Buying any asset at a cheap price that undervalues its prospects is always a better idea than purchasing it at a premium price.
With many UK shares still trading at prices in negative territory year-to-date, there appears to be a wide range of opportunities to purchase cheap stocks for the new bull market.
High-quality stocks in the FTSE 100 and FTSE 250
Of course, Warren Buffett also considers the quality of a company before adding it to his portfolio. As a result, he doesn’t simply purchase the cheapest stocks he can find. Instead, he aims to buy high-quality companies when they trade at cheap prices.
At the present time, a number of industries face tough outlooks. They include banking, airlines, energy and hospitality sectors. Within them are a wide range of high-quality businesses that have delivered attractive levels of sales and profit growth in recent years.
However, due to the pandemic, they now face extremely difficult operating conditions unlikely to be repeated in their severity over even a very long timeframe.
Therefore, following Warren Buffett’s strategy and buying such companies could be a sound move. They may offer cheap prices, financial stability in the short run. They also could benefit the most from an economic recovery that sustains a long-term bull market.
Taking a long-term view of the new bull market
Warren Buffett’s long-term view may also be worth mirroring in the new bull market. Historically, bull markets have lasted for much longer than bear markets.
For example, the global financial crisis lasted for a matter of months in terms of its impact on share prices. The bull market that followed lasted for around a decade.
Therefore, buying and holding today’s cheap shares could be a sound move. It may allow an investor to maximise their returns and fully benefit from a likely improvement in investor sentiment and share prices over the coming years.
