3 aspects of Warren Buffett’s investing approach I’d follow in this stock market rally

I think Warren Buffett’s long-term focus and value approach could prove to be very helpful in this stock market rally.

Peter Stephens ❯

Having held various senior management positions in the manufacturing sector, Peter founded his own manufacturing company in 1996. This was subsequently sold in 2007. Meanwhile, his passion for investing (which began during the privatisations of the 1980s) remains strong and he couples this with writing for The Motley Fool as a Contractor. His investment style is value-oriented; focusing on company fundamentals, as well as assessing the strength and presence of a competitive advantage. While above-average growth prospects remain very attractive, a greater focus on dividends has crept in since Peter became a part-time retiree in 2007.

Published 7 February, 2021 10:28 am GMT

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Warren Buffett has a very successful track record of generating high returns from his investments in shares. This doesn’t mean he outperforms the market all of the time, or generates positive returns on every investment. But it has enabled him to deliver relatively consistent capital returns over the long run.

As such, following the billionaire investor’s focus on buying undervalued shares for the long term (while also holding some cash) could be a worthwhile move in this stock market rally.

Warren Buffett’s focus on undervalued shares

Even after the FTSE 100’s 30% gain since its lowest point in March 2020, a number of companies continue to trade at prices below their long-term averages. This may mean they provide buying opportunities based on Warren Buffett’s focus on investing money in undervalued shares.

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Clearly, some UK stocks may trade at low prices because they’re weak companies with poor prospects. However, investor sentiment towards high-quality businesses operating in sectors with uncertain futures could provide the opportunity to buy them at low prices. Doing so could provide greater scope for high capital returns in the long run. Certainly as a world economic recovery becomes increasingly likely.

A long-term view of a stock market rally

While the recent stock market rally is likely to have been good news for many UK investors, it’s not guaranteed to continue. As such, following Warren Buffett’s long-term standpoint could be a shrewd move. He doesn’t seek to make money quickly on shares. Rather, he seeks to capitalise on the market cycle through buying undervalued shares and holding them for a sustained period of time.

Certainly, the current stock market rally may persist for many months, or even years. However, by taking a long-term view, the short-term performance of the stock market may become less important. This may provide portfolio holdings with the time they need to deliver on their potential.

Holding cash for peace of mind

The present economic outlook is very uncertain. As such, Warren Buffett’s insistence on holding large amounts of cash could be a sound move. Clearly, low interest rates mean the returns on cash savings are likely to be very poor. This situation could realistically persist over the coming months, as policymakers seek to stimulate the economy’s performance after a very challenging period. However, having cash available in case of an emergency could provide peace of mind.

Furthermore, cash can provide greater financial flexibility to take advantage of short-term stock market movements. For example, the 2020 stock market crash occurred over a very short time period before a recovery commenced. Having cash available may mean an investor is relatively liquid and can respond quickly to market opportunities that may only be available for a very limited period of time.