If you’ve got money invested in the UK stock market, you need to hear these Warren Buffett tips.
He knows that when times are tough there are big gains to be made, if you can identify the right shares to invest in. So what are the most important things we need to know? How do we pick the stocks to make a million?
Bad news is an investor’s best friend
When markets are volatile it means one major thing: there will be good companies going cheap. When all the dust has settled on the other side of Brexit, aggressive investors who bought solid companies at bargain prices will win again and again.
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I’ve made the mistake of checking my portfolio too often, feeling the pain of dipping markets and the creeping urge to get out. But I’ve always regretted it, every time.
A FTSE 100 7% dividend stock like Aviva, for example, will continue making long-term profits and paying out to investors, no matter its short-term costs or the price of the pound.
“Fears regarding the long-term prosperity of the nation’s many sound companies make no sense,” Buffett wrote in a 2008 op-ed for the New York Times. In the midst of an economic crisis, Buffett was buying. Or, more accurately, he was waiting in the wings with cash on hand, waiting to snap up companies on the cheap. “Most major companies will be setting new profit records five, 10 and 20 years from now,” he said.
Ditch debt to buy well
Happily, the secret of Warren Buffett’s investing success is no secret at all. Had I learned it sooner, one tip that would have made me richer would have been to ignore companies with lots of debt. On a balance sheet, this is usually referred to as ‘net gearing’, which is the company’s debt-to-assets ratio.
Heavily geared companies have free cash flow sucked out of the business on a daily basis and come with a big red flag. Any gains are built on the sands of debt. The piper must be paid in the end and likely at investors’ expense.
When I recommended British Land a few months back, I noted it only carried a 25% net gearing, low for a real estate investment trust. The pressure of paying back short-term debts won’t hold up other investments or income streams.
Ignore the noise and think long term
When you look back at your portfolio a year from now, you’ll be cursing if you let yourself make emotional short-term decisions.
“If you aren’t willing to own a stock for 10 years, don’t even think about owning it for 10 minutes,” Buffett wrote in his 1996 letter to Berkshire Hathaway shareholders.
Those 10 years will take us into 2029, through Brexit, probably two, three or more Prime Ministers, and perhaps even a World Cup-winning England team (a man can dream, can’t he?).
Any short-term downturn in sentiment — how the market feels about future prospects — lets you buy a piece of big FTSE companies at a knock-down price.
Keep your watchlist short, and a little cash in reserve to pounce on opportunities when they crop up. They will crop up. Just wait, you’ll see.
