Investing in stocks can sometimes be a wild ride. But loading up on cheap UK shares also gives me a chance to build substantial wealth over the long term.
Financial markets are famously complex and unpredictable, meaning none of us can accurately predict how they will move in the short term. This doesn’t matter to me though.
At this point, I’m minded to mention billionaire investor Warren Buffett’s immortal line that “nobody buys a farm based on whether they think it’s going to rain next year.” This approach to stock investing has made him the fourth-richest person on the planet.
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Strong returns
Buffett is a believer in the excellent long-term returns that share investing can produce. The Berkshire Hathaway boss primarily buys positions in US stocks. I’m taking a different path by investing mostly in UK shares.
While past performance isn’t a reliable indicator of the future, this is a tactic I think could pay off richly for me. Between its creation in 1984 and 2022, the FTSE 100 has delivered an average annual return of 7.5%. The return on FTSE 250 shares, meanwhile, sits at an even higher 11% in the 30 years to 2022.
Targeting value like Buffett
I’m confident that building a diversified portfolio dominated by FTSE 100 and FTSE 250 stocks will prove a successful strategy. This helps me spread risk and capture a wide spectrum of growth opportunities.
As I touched upon above, I also make a point of targeting cheap shares, like Buffett. The theory is that investing in quality, undervalued companies today will generate significant capital gains over time as the market eventually recognises their value and prices subsequently rise.
2 cheap shares on my radar
This is why I’m hoping to buy more Rio Tinto shares following recent share price weakness.
The mining giant has dropped 12% in value over the past 12 months as worries over China’s recent economic performance have grown. This leaves it trading on a forward price-to-earnings (P/E) ratio of just 8.7 times.
News this week that China’s economy grew by a less-than-expected 5.2% in Q4 has added to worries over near-term earnings. But this isn’t sapping my appetite for the company.
Over the long term, I expect earnings to soar as themes such as decarbonisation, urbanisation and population growth drive long-term metals demand. Rio Tinto’s enormous resources also gives it scope to boost profits through more acquisitions.
I’m also looking to add ITV shares following their whopping 55% price drop over the past year. The commercial broadcaster now trades on a rock-bottom P/E ratio of 7 times for 2024.
The chances of further share price weakness are high as the UK economy struggles. Ad revenues — a critical profits driver for the FTSE 250 firm — have sunk more recently as companies have scaled back spending.
However, I believe ITV’s share price could recover strongly over the long term. Its ITVX streaming service continues to perform strongly, and may become a significant profits driver as viewer habits continue evolving. Expansion of its ITV Studios production arm is also tipped to pay off handsomely.
There are stacks of other brilliant value stocks that I can buy. So I’m building a shopping list of the best ones to improve my chances of building my wealth.
