Image source: Getty Images
It's no secret that billionaire investor Warren Buffett has an impressive track record of generating high returns. Since the 1960s, his Berkshire Hathaway The investment portfolio achieved annualized gains of nearly 20%, roughly double what the stock market generated over the same period. In doing so, he is now one of the richest investors in the world with seemingly unlimited financial freedom.
It is an envious position. But by following his methods, ordinary investors could be on the path to improving their financial prospects.
UK shares have enjoyed a strong rally this year thanks to cooling inflation and falling interest rates. However, many stocks continue to trade at cheap prices that could make even Buffett go crazy. In other words, now could be a great time to start the journey toward financial freedom. And doing so could help someone with no savings in 2024 build up surprisingly large savings for retirement.
A focus on undervalued stocks
Capitalizing on underrated businesses has been a core philosophy of Buffett's investment philosophy and strategy. In more recent years, it has started to be more lenient in considering fair prices rather than just cheap. But what remains constant is their pursuit of quality.
Over decades, the best-performing stocks have almost always been the highest-quality companies. After all, business performance is ultimately what drives prices up. Fortunately for British investors, the FTSE 350It is full of such companies, many of which trade at fair prices and some of which are also cheap.
Carry RS Group (LSE:RS1) as an example. The omnichannel distribution business is currently going through a cyclical slowdown in the global manufacturing sector, especially in electronics. Consequently, the share price has fallen by almost a third since the beginning of 2022.
However, despite all the obstacles, the underlying business has proven to be quite resilient. Cash generation remains strong, helping to reduce the group's leverage and resulting in a healthier balance sheet. And to top it all off, management recently launched a cost-reduction program that has already started to show results.
Now that economic conditions have begun to improve, manufacturing production is steadily increasing around the world. Therefore, investors may be looking for an opportunity to consider quality stocks at discount prices.
Manage risk
Even if RS Group manages to capitalize on the eventual rebound in the manufacturing sector, buying shares today still carries risks. The company operates in a cyclical industry and another recession is almost certain to occur again.
These threats can be best managed with a healthy dose of portfolio diversification. However, diversifying also has its downsides.
The more shares an investor owns, the harder it is to outperform the market. And that's why Buffett's portfolio is highly concentrated in just a handful of businesses. Portfolio concentration opens the door to potentially significantly higher returns. But it also amplifies the damage of making a bad investment. And even Buffett had his fair share of these over the years.
It is up to individual investors to determine what level of risk they are able or willing to take. But when risk is managed properly, a portfolio of blue-chip stocks purchased at good prices can be a powerful way to build wealth over the long term and eventually achieve financial freedom.