Forget the National Lottery: I’d get rich and retire early by following Warren Buffett

Value investing as per Warren Buffett’s strategy could provide a sound means of building a large investment portfolio in my view.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

For some people, investing in the stock market is akin to buying a National Lottery ticket. Ultimately, in their view, share prices are impossible to accurately forecast, and there is a significant amount of luck involved in investing in the stock market.

Of course, the success of investors such as Warren Buffett helps to disprove this theory. While share prices may be incredibly difficult to predict in the short run, a strategy that aims to buy high-quality stocks while they trade at fair valuations has a good chance of yielding high returns in the long run.

As such, rather than buying a National Lottery ticket, I’d look to follow Warren Buffett’s advice and focus on consistently outperforming the stock market through value investing.

High-quality stocks

Investing in high-quality companies can increase your chances of generating impressive returns on the stock market over the long run.

While every investor will have their own interpretation of what constitutes a high-quality company, focusing on fundamentals such as debt, cash flow and profit track record could be a good place to start.

With interest rates likely to rise over the long run, buying companies that are highly-indebted could increase the risk of loss for an investor. Likewise, stocks with weak cash flow may be unable to pay a rising dividend, and businesses that have struggled during periods of uncertainty for the wider economy may prove unpopular as the trade dispute between the US and China intensifies.

Through buying shares that offer lower debt, strong cash flow and a track record of growth in a range of market conditions, it may be possible to improve the risk/reward ratio of your portfolio.

Value investing

As well as buying high-quality businesses, Warren Buffett also seeks to purchase stocks that are fairly priced. Not only does this mean that there is an increased chance of generating high returns, it also reduces risk as a result of a margin of safety being on offer compared to a company’s real value.

Clearly, there are a variety of methods through which an investor can value a business. However, by remaining consistent in terms of the methodologies used and their application, it may be possible to find the most appealing stocks within a specific industry. Over time, they may be able to outperform their sector, as well as the wider stock market.

Holding period

Although trying to predict the stock market’s movements in the short run may be a highly challenging process, over the long run it has historically risen.

Certainly, there have been major downturns that have seen 50%+ wiped off the value of indices such as the FTSE 100 and FTSE 250. But, through following Warren Buffett’s advice on holding for the long term, it may be possible for any investor to get rich and retire early.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

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.

More on Investing Articles

Investing Articles

Up 105% in a year! Is this rocketing FTSE bank the perfect pick for my Stocks and Shares ISA?

Harvey Jones is drawing up a shortlist of stocks to purchase inside his Stocks and Shares ISA allowance. This FTSE…

Read more »

Investing Articles

Is it madness to buy Palantir shares after Q3 earnings?

Palantir stock's surging again after the firm's Q3 earnings report. But after a 150% gain, is it too late to…

Read more »

A pastel colored growing graph with rising rocket.
Investing Articles

£6,000 in savings? Here’s how I’d aim to turn that into £1,032 a month of passive income!

A small investment in high-dividend-paying stocks with the returns used to buy more shares can generate big passive income over…

Read more »

Chalkboard representation of risk versus reward on a pair of scales
Investing Articles

As Lloyds’ share price tumbles 14%, is this an unmissable opportunity for me to buy at a bargain-basement price?

The Lloyds share price is substantially below its year high, but decent earnings prospects should drive its price and dividend…

Read more »

The flag of the United States of America flying in front of the Capitol building
Investing Articles

2 UK shares that could rise if Trump wins the Presidential election

These UK shares are among the FTSE 100's most popular stocks. And they could rise in value if Donald Trump…

Read more »

Closeup ruffled American flag representing US stocks and shares
Investing Articles

2 UK stocks that could rise if Harris wins the Presidential election

Royston Wild believes these UK stocks could receive a bump if Kalama Harris wins the Presidency, giving their share prices…

Read more »

Investing Articles

After a 96% plunge, is buying more Aston Martin shares throwing good money after bad?

Just two weeks after buying Aston Martin shares Harvey Jones found himself nursing a painful loss. Yet after recent news…

Read more »

Investing Articles

After crashing 45% in October, should I buy this FTSE 250 share for my Stocks and Shares ISA?

Roland Head explains why he’s tempted to add this risky FTSE 250 turnaround share to his Stocks and Shares ISA…

Read more »