What makes something cheap? Is it just the price? I don’t think so: even a low price can be too expensive for something of very poor quality. I see cheapness as approx value. So when I look for cheap stocks, I look for great quality companies with a price tag below what I think they deserve.
I can hardly claim credit for such a course of action. It’s one used by many investors, including billionaire Warren Buffett. As Buffett has said in the past, “price is what you pay. Value is what you get”.
With stock markets on edge this month, some stock prices have tumbled. But I think many of the companies affected have not seen their underlying commercial prospects deteriorate. It gives me the chance to win cheap shares in iconic British names. That’s exactly what I’ve been doing for the past few weeks. I remain bullish on the current volatile market!
How to find cheap stocks
So what approach do I take when sniffing out bargains?
I stick to what I know. Like Buffett, I think it increases my ability to know what I’m judging. He refers to this as staying within his purview.
I look for companies that I believe have a strong competitive advantage in an industry that I expect to see ongoing customer demand. For example, I have recently added to my inventory of JD Wetherspoon. I think its existing network of pubs and familiar value proposition help set it apart from the competition.
Then I consider what I think a business will be worth in the long term. Even within my area of expertise this can be challenging. After all, risks can be difficult to assess and quantify.
Sometimes I have such a hard time valuing a business that I simply give up. Optionally Hypgnosis is a bargain but I just don’t feel qualified to judge. I don’t quite understand the long-term prospects for song royalties.
In search of value
When I feel I can value a company, I look to see if its shares are cheaper than my valuation, which takes into account the opportunity cost of tying up money in it over time. This is basically a form of the method known as discounted cash flow valuation.
However, I can make mistakes and some risks can end up being more expensive than I expect. So, like Buffett, I aim to invest with a margin of safety.
To me, cheap stocks are not those that sell for a little less than I think they are worth. Instead, they are what I see as screaming bargains: they trade at a significantly lower price than I think they deserve.
Throw in good deals
Sometimes I see few or no such offers on the market.
But at other moments, even for companies with strong prospects, share prices fall. I bought Wetherspoon because I think it’s a bargain at the moment. I am looking for other cheap stocks to add to my portfolio during this time of market turmoil.
The post In This Market I Follow Warren Buffett To Scoop Up Cheap Stocks! appeared first on The Motley Fool UK.
C Ruane holds positions in JD Wetherspoon Plc. The Motley Fool UK has no position in any of the stocks mentioned. The views of the companies mentioned in this article are the author’s and therefore may differ from the official recommendations we provide in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool, we believe that considering a wide range of insights makes us better investors.
Motley Fool UK 2023