If I had very few savings as I entered my thirties, could I still build a long-term cash pile that might let me retire early? I think the answer is yes. One way I would try to do that is by building a portfolio of cheap shares to hold for the long term.
Quality and long-term investing
As a believer in long-term investing, when I buy shares I am not looking to benefit from a short-term price jump.
Instead, I am buying a small stake in a business I think has good potential in the years and decades to come. If it does well, hopefully as a shareholder I can benefit.
Hunting for cheap shares
However, whether or not a company is rewarding for me as an investor does not just rely on how good a business I buy into.
It also depends on what price I pay for the shares. Like anything, even the best company can turn out to be a poor investment if I overpay for it.
That is why I would focus my search on cheap shares. By that I do not necessarily mean shares with a low price, like Rolls-Royce and Lloyds Bank, whose shares both trade for pennies. By cheap, I mean the share price offers me value compared to what I perceive as the long-term value of the business.
How to value shares
Of course, no one knows today what the long-term value of a business is. So I will need to make some assumptions. That is why, like Warren Buffett, I stick to businesses and industries I understand. That makes it easier for me to assess their prospects.
By looking at the probable future size of a market and a company’s business, I can work towards an estimate of its earnings. I can then value it using a method like the price-to-earnings ratio. If the shares are much cheaper than I think they should be, I could consider adding them to my portfolio.
But earnings are only part of the equation. I also want to know what might stop the company sharing those earnings with shareholders or reinvesting them in business growth. That is why I also always look at what debt a company carries on its balance sheet.
Starting today
So if I was 30 and wanted to put such a plan into action, what would I do?
A lack of savings is not necessarily problematic: I could start to put aside a set amount each week or month and use it to build funds to invest. I would hunt for a variety of cheap shares to buy, bearing in mind that to reduce my risk I would want to diversify across a range of companies and industries.
I would then let time have its effect, hopefully seeing the value of at least some shares increase while using dividends to boost my available investment funds. If I can grow the value of my investments over time, hopefully that could help me bring forward my retirement date!
The post With almost no savings at 30, I’d start buying cheap shares to retire early appeared first on The Motley Fool UK.
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C Ruane has positions in Rolls-Royce Plc. The Motley Fool UK has recommended Lloyds Banking Group Plc. 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.