Warren Buffett has become one of the richest people on earth by investing in shares using a relatively simple strategy. His focus on buying high-quality companies when they trade at low prices has enabled him to outperform the stock market on a fairly consistent basis.
As such, following his plan could be a shrewd move. It could reduce the amount of time it takes to double an initial investment of £1k, or any other amount, over the coming years.
Warren Buffett’s quality focus
Clearly, determining whether a company is a high-quality operation is very subjective. Different investors are likely to have opposing views on the subject. However, Warren Buffett focuses on areas such as a company’s competitive advantage and financial situation when deciding whether it’s attractive or not.
Examples of competitive advantages that could increase the appeal of a business include unique products, strong customer loyalty and a low cost base that provides the scope for higher margins. Meanwhile, companies with modest debt levels and strong free cash flow may be more likely to survive periods of economic weakness.
Through buying stocks with competitive advantages, Warren Buffett tilts the investment odds in his favour. Such businesses are more likely to deliver profit growth in the long run that has a positive impact on their share prices.
Buying undervalued shares
Buying high-quality companies is just one part of Buffett’s investment strategy. Importantly, he aims to buy such companies when they trade at low prices. This provides greater scope for capital growth over the long run. That’s opposed to buying them at high prices that may already incorporate market expectations of their future growth potential.
Companies can trade at low prices for a variety of reasons. For example, at the present time, they may be experiencing challenges caused by coronavirus. Or they may be struggling to deliver rising sales because of economic weakness. In such instances, there may be opportunities for long-term investors, such as Warren Buffett, to take advantage of their short-lived low valuations.
Doubling an investment in shares
Buffett’s strategy has consistently allowed him to outperform the stock market. But even tracking an index such as the FTSE 250 could allow an investor to double their initial investment in shares over the long run. For example, the mid-cap index has produced annualised total returns of 9% in the last 20 years. The same return in future would lead to a doubling of an initial investment in around eight years.
However, through buying high-quality companies when they trade at low prices, it is possible to reduce the amount of time it takes to double an investment in shares. As such, it could be worth following Warren Buffett’s strategy today while there are many opportunities to put it into action.
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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.