Warren Buffett is probably the most famous investor around. I credit a lot of my investing knowledge to the advice he’s given over his long and successful career. One of his famous quotes really struck a chord with me: “If you don’t find a way to make money while you sleep, you will work until you die.”

Something clicked for me when I first heard this. It made me think that I should really focus on long-term investing as it’s a great way to make my money work, all year round. Then, when the dividends start rolling in, I’m on my way to generating passive income.

There are many ways to focus on long-term investing. I’m going to explore some Warren Buffett methods here with passive income in mind.

Warren Buffett and passive investing

Even though Buffett himself is an active investor – buying and selling stocks directly – he’s also an advocate for index funds. This is when an investor buys shares of a fund that aims to replicate the performance of a stock index, like the FTSE 100. Buffett said in his annual shareholder letter in 2016: “Both large and small investors should stick with low-cost index funds.”

Often, this strategy is referred to as passive investing because I’d simply track the performance of a stock index. I use this technique in my own portfolio. The fees for index funds are typically low (just like Buffett suggests). Furthermore, an index fund is diversified with many stocks, so the risk is generally lower. There’s always a chance of a stock market crash though, so my initial investment could fall in value.

I’ve set up a direct debit to put money into my ISA each month to buy one particular stock — iShares FTSE UK Dividend Plus, an exchange traded fund (ETF). Of course, the returns from a tracker may be less spectacular than from some individual stocks. But the current 12-month dividend yield is 5.7%. A yield this high can really help towards my passive income goal. The fee is low at 0.4% annually, and my broker lets me buy at zero dealing cost. 

Increasing risk and reward

But overall, he certainly isn’t a passive investor. He’s had an illustrious career by investing in companies he knows well, and then holding them for very long periods (often decades). A private investor like me can do that too, as long as I research every company thoroughly before I buy its shares.

I have to remember that buying single stocks is riskier than investing in an index fund. Price volatility is typically higher, and I’d be less diversified. Nevertheless, the potential returns are higher to compensate for this increased risk.

In addition to my index fund, I buy high-yielding dividend stocks to increase my passive income. I own shares of Legal & General and British American Tobacco, two companies with yields of 6.5%+. Rio Tinto is another stock I buy as it currently offers a dividend yield of 8.8%.

Together with my index fund, buying single stocks has seen me generate a growing passive income stream over the years. Now, my money does work while I sleep, as Warren Buffett advised. I’m taking a long-term view from here and adding to my investments so that my passive income keeps growing.

Dan Appleby owns shares of Legal & General, British American Tobacco, Rio Tinto and iShares FTSE Dividend Plus. The Motley Fool UK has recommended British American Tobacco. 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. Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

A million pound retirement portfolio can sound like a lofty goal, but I think its achievable using shares and share-backed investments such as funds.

For example, according to online trading provider IG Group, between 1984 and 2019, the FTSE 100 index delivered an annual total return of 7.8% — that figure includes the income from dividends. And I think a similar 35-year performance is possible starting from today with the Footsie. But it’s not guaranteed, of course.

Compounding potential stock market returns

If I were to invest a sum of £500 a month and compound annual total returns of roughly 8%, I’d end up with just over £1m after 35 years. And one way of targeting that kind of outcome would be to invest in tracker funds following the stock market. I might, for example, invest in trackers following the FTSE 100, FTSE 250 and small-cap indices. And I could diversify into other trackers as well, such as one following America’s S&P 500 index or other markets abroad.

Stock market returns and percentage levels can be volatile and they’re never certain. But the first step I’d take in my quest for a million would be to invest regularly in share-backed vehicles for the long term.

However, a million pounds in 35 years’ time will likely have less spending power than a million pounds today. Price inflation is all over the news right now, and it’s become a prominent feature in most people’s everyday lives. So, to combat its ravages, I’d take the second step of increasing the level of my monthly investments whenever possible. For example, I’d raise the monthly figure every time my salary increased. And in that way, the eventual value of my retirement pot has a better chance of keeping pace with inflation.

Two key variables

But key to the success of my programme of stock market investment would be to focus on the process of compounding. The concept means that gains build on earlier gains to really drive forward the value of a portfolio. And two variables can make big differences to the end result.

The first is time. The longer I’m compounding my gains, the bigger the end result, yes. But the biggest absolute annual gains arrive in the later years. So it really is important for me to keep compounding for as long as I can before retiring.

The second variable is the level of annualised gains achieved. And small differences in those gains can compound out to big differences in the end result. For example, if I achieved a 10% annual return instead of 8% and compounded it for 35 years as in the illustration above, I’d end up with more than £1.7m instead of the £1m mentioned earlier.

So, the third step in my quest to achieve a million pound retirement fund would be to seek higher annualised returns from my stock market investments. And to do that, I’d combine my tracker fund investments with the shares of selected individual companies.

There’s no guarantee I’d achieve higher annualised returns. But I’d aim to research companies carefully and invest when valuations look attractive with the goal of mitigating some of the risks that all shares carry.

Kevin Godbold owns shares in IG Group Holdings. The Motley Fool UK has no position in any of the shares mentioned. 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.

Whenever I have covered NIO (NYSE: NIO) stock in the past, I have always tried to clarify that I think the company has potential. However, its valuation and corporate structure have scared me away. 

But following the recent slump in the company’s share price, it is down around 60% over the past 12 months, I thought it might be worth taking a closer look at the business to see if its valuation has fallen to a more appropriate level. 

NIO stock outlook

The question of whether or not the stock looks attractive at current levels is not particularly easy to answer.

As it is not yet turning a profit, NIO is challenging to analyse. So rather than analysing the company’s bottom line, I will have to try and review the corporation based on its top-line sales growth. 

Based on current Wall Street forecasts, the enterprise has the potential to report sales of around $4.5bn in 2021. This figure could rise further to nearly $10bn in 2022. 

Of course, this growth is not guaranteed. Several factors will determine whether or not the firm will hit this target in the year ahead. 

Demand for the company’s vehicles is high, but the group can only produce so many. It does not own its own factory. Instead, NIO’s vehicles are built in a plant owned by a joint venture between the firm and its manufacturing partner, state-owned automaker Jianghuai Automobile Group.

New facility 

Capacity at this factory is limited, but the partners are in the process of building another facility. Progress is good, and it looks as if vehicles will start rolling off the production line in the second half of 2022. 

On top of this, NIO plans to launch a further three new vehicles over the next 12 months. These new launches should open up the company to different markets. So it looks as if the demand will be there to meet the extra capacity available from the new facility. 

At the time of writing, NIO stock has a market capitalisation of $33bn. If the group can generate total sales of $10bn by 2023, this suggests that the business is trading at a forward price-to-sales (P/S) multiple of around 3.3. 

By comparison, peer Tesla is dealing at a P/S multiple of nearly 16. 

Valuation gap

These two companies are not directly comparable. Nevertheless, I think these two valuations illustrate the price gulf between two firms that both make EVs. The Chinese automotive manufacturer looks dirt cheap compared to its US peer. 

That said, there is no guarantee that the enterprise will be able to increase production capacity significantly over the next two years.

There is also still a question mark hanging over the company’s corporate structure. I think both of these factors warrant a lower valuation compared to Tesla.

Still, a discount of nearly 80% seems excessive. 

Despite this gap, I will not buy the shares for my portfolio today. I would rather wait on the sidelines and see how NIO’s business evolves over the next 12 months and see if it hits Wall Street’s production targets. If it does, I will reevaluate the opportunity. 

In the meantime, I think there are plenty of other attractively priced securities. 

Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has recommended Tesla. 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.

It’s a good idea (in my opinion, at least) to see what UK shares the market’s big beasts are betting against when deciding what to invest in. Many financial websites and organisations publish readily-available data showing which stocks hedge funds and institutional investors are ‘shorting’. These are the equities that major investing like these are expecting to make them money by falling in price.

The process of shorting “involves an investor borrowing and selling shares they do not actually own in the hope of repurchasing them at a lower price at a later date”. Major investors like hedge funds have made fortunes by playing the market this way. But they don’t always get it right.

Exchange-traded fund (ETF) provider GraniteShares has just published its list of Britain’s most shorted stocks. The following UK shares occupy the top two positions of companies the big players are expecting to slump. Should I avoid them like the plague? Or, as a long-term investor, should I take a punt?

#1: Cineworld

Cinema operator Cineworld Group (LSE: CINE) has long been the London Stock Exchange’s most-shorted share. According to GraniteShares, a whopping 8.8% of its stock is currently held short. This doesn’t come as a massive surprise to me.

I used to own shares in Cineworld, but sold out at the height of the Covid-19 crisis in autumn 2020. I sold at a time when its cinemas remained shuttered and it had a hulking amount of debt on the balance sheet. At that time, a coronavirus vaccine was yet to be produced and uncertainty loomed as to when the business would reopen its doors.

The outlook has improved for Cineworld since then. Vaccines mean that theatres in its core markets have re-opened and strong trading in recent months shows how strongly the pull of the cinema remains in the post-coronavirus age. Sales in December came in at almost 90% of 2019 levels, latest financials showed. A string of blockbusters in 2022 and beyond could keep its cinemas packed out too.

Massive debts cast a shadow

That said, it’s still far too early to claim that Cineworld is out of the woods. My main concern is the enormous multi-billion-dollar debts that still sit on the company’s balance sheet.

At best this could hamper its ability to capitalise on the rebounding movie industry compared to other cinema chains. It might also affect the levels of investment Cineworld can make to take on Netflix and the other streaming giants. Major changes to the way studios release their films has also raised the stakes for cinema operators like this.

My main worry though is how Cineworld’s net debts could strangle the business if the coronavirus crisis worsens again. These stood at a mammoth $8.4bn as of last June. The sudden and severe recent impact of the Omicron variant — and the return of masks and social restrictions in many territories — underlines the ongoing risk to leisure shares like this.

Cineworld’s debts are set to grow further after a legal ruling related to its abandoned takeover of Canada’s Cineplex too.

#2: Petropavlovsk

Mining company Petropavlovsk (LSE: POG) is another UK share that’s in peril of falling in value. But unlike Cineworld, I think it might be worth close attention today. This is because I believe the outlook for gold prices remains pretty bright.

According to GraniteShares, 6.1% of Petropavlovsk’s shares are currently shorted, putting it second on the list of least-desirable UK shares. Gold stocks have come under extreme pressure in recent months as rocketing inflation across the globe has led to expectations of extreme central bank policy tightening.

When interest rates rise, the value of the US dollar increases, the prime currency in which the yellow metal is traded. This makes it less cost effective to buy the commodity and so demand for it drops, yanking prices lower in the process.

To illustrate the point, Petropavlovsk’s share price just closed at two-year lows below 15p after the Federal Reserve suggested it could raise rates sooner and more sharply than the market had been anticipating. The central bank’s appetite for serious action could grow too if key inflation gauges continue to show runaway price rises. Consumer prices in the States were recently rising at their fastest rate since 1982.

Could gold prices soar again?

Still, it’s my opinion that gold prices — and by extension Petropavlovsk’s share price — could stage a strong recovery. The safe-haven metal surged to its highest price on record above $2,070 per ounce in summer 2020 as Covid-19 bashed the world economy and investor confidence. As I mentioned above, another flare-up in the pandemic could happen at any stage and turbocharge demand for gold again.

There are other reasons why gold could soar in the near future as well. Recent military developments surrounding Ukraine helped the precious metal climb before those Federal Reserve comments prompted another about-turn. A full-scale invasion would likely push investor interest in flight-to-safety bullion much higher again. I’m also aware that Russian and Chinese expansionism could provide a long-term driver for gold values too.

Looking at Petropavlovsk more closely, I think the steady ramping up of its low-cost POX Hub could help profits (and by extension the share price) rise strongly over the long term as well.

At current prices, Cineworld’s share price commands a forward price-to-earnings (P/E) ratio of 16.9 times. I think this looks quite expensive, given the firm’s high debt levels and the huge risks it faces. But, by comparison, Petropavlovsk trades on a modest P/E multiple of 4.8 times.

I think this makes it highly-attractive from a risk-to-reward basis. Indeed, I’d happily buy the gold miner for my own UK shares portfolio today.

Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

As Scottish Mortgage Investment Trust (LSE: SMT) shares have plunged in value over the past couple of weeks, I have been wondering if I should double down on the stock. I do not own the trust directly, but I own some of its most significant holdings. Acquiring the stock would mean increasing my exposure to these companies overall. 

Time to catch a falling knife? 

Buying shares when they are falling in value is never easy. More often than not, investors are selling because there is something wrong. In this case, it looks as if the market is becoming worried about the outlook for highly valued growth shares. Analysts are starting to question whether or not these businesses can maintain their lofty growth trajectories. 

In all honesty, I do not want to increase my exposure to companies that may struggle to live up to their reputations. If they continue to underperform, Scottish Mortgage Investment Trust shares could continue to fall. 

However, I would not just be buying shares in individual businesses with this trust. I would also be acquiring the investment reputation and skills of the managers at Baillie Gifford. This investment manager has a fantastic reputation for finding early-stage growth stocks in public and private markets.

Indeed, Scottish Mortgage has a portfolio of private investments alongside its public equity portfolio. As such, in some respects, I would not be doubling down on the positions I already own. I would be doubling down on some holdings, but I would also be acquiring completely new positions in different companies.

Are Scottish Mortgage Investment Trust shares undervalued? 

This is something I have to take into account when analysing the trust and its potential. I am not just buying exposure to a portfolio of growth stocks. I am also acquiring an experienced management team, portfolio of private companies, and pipeline of other potential investment opportunities. 

Of course, there is a fee for this management. The trust charges an annual management fee of 0.34%. This is something I will have to keep in mind as we advance. Other fees may also be levied on top of this management charge, such as dealing and borrowing costs.

The trust is also highly concentrated. The top four holdings make up around 25% of assets under management. I am not entirely comfortable with this level of concentration. It would only take one disaster in the portfolio to significantly impact overall returns. 

Still, even after taking this risk into account and factoring in the trust’s management fees, I think I will be happy to double down on Scottish Mortgage Investment Trust shares.

Being able to invest alongside such an experienced team of growth investors and a portfolio of private companies is an extremely attractive opportunity, especially for a long-term investors like me. 

Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

At the time of writing, the easyJet (LSE: EZJ) share price is changing hands at around 620p. This is a significant discount from the company’s pre-pandemic level. In 2018, the shares touched an all-time high of around 1,500p. 

A lot has changed since then. The pandemic gutted the business, and it had to pull out all of the stops to survive the crisis. 

Since then, the business has been struggling to return to growth. It does not look as if passenger numbers will return to 2018 and 2019 levels any time soon.

While the company recently reported a significant increase in fiscal first-quarter revenues of £805m from £165m this time last year, passenger numbers were still just 64% of 2019 levels. These numbers suggest that the business’s recovery has a long way to go. 

Still, I think there is a chance the stock could rise substantially from current levels the group’s operating performance improves as analysts expect over the next two years. 

EasyJet share price outlook

The most significant factor that will dictate the company’s performance over the next couple of years is passenger numbers. When passenger numbers return to 2019 levels, the corporation’s sales and profits should follow suit. 

Unfortunately, some other factors will also influence the outlook for the easyJet share price. Rising fuel prices and wage costs will hit overall profit margins. Then there is the competitive environment to consider. 

All of the company’s peers are also trying to entice consumers back to their brands. Some are offering significant discounts, which could start a price war in the sector. 

The one advantage easyJet has over the competition is its holidays business. Unlike other airline groups, which tend to point consumers to third parties to book hotels and other experiences, easyJet holidays does all the work for consumers.

This provides a differentiator for the group in a competitive environment. 

And I think this differentiator could help drive the company’s recovery over the next few years. If consumer confidence recovers significantly over the summer, there could be a substantial increase in holiday bookings. This would help the organisation’s holidays business and its airline.

If this growth continues throughout the rest of the year, earnings growth could quickly return. If growth returns, the market could re-rate the easyJet share price. 

Growth potential

City analysts believe that by 2023, the company’s earnings will have returned to 2023 levels. If the organisation achieves this target, it is currently trading as a forward price-to-earnings (P/E) multiple of 13.1.

In comparison, many of its peers are selling at a P/E of 20. If the stock hits this valuation, the easyJet share price could hit 950p or 55% above current levels. However, this does not take into account any potential growth after 2023. 

As such, in the best-case scenario, I think the stock has substantial potential over the next couple of years to rise 50% or more. The business may encounter some challenges along the way, but I would buy the stock for my portfolio to take advantage of this growth potential as the economy recovers from the pandemic.

Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

It hasn’t been a great start to 2022. Share prices have generally declined, particularly in the US. I wouldn’t say there’s been a stock market crash just yet, but it might well happen. Although times like these are difficult for investors like myself, I try to see volatile markets as an opportunity. After all, if the companies are trading well, I could snap up some bargains when share prices fall.

Here’s a company I’ve got my eye on if stock markets do crash.

The investment case

The company is Microsoft (NASDAQ: MSFT), the software giant that’s listed in the US. Its products are used globally in most homes and businesses, which I think brings a considerable competitive advantage. For example, its Office suite of software is crucial for many companies, and it’s typical for job applications to list it as a required skill. Not many other software companies can boast that their products are so important for businesses.

Microsoft’s competitive advantage makes it a quality stock, in my view. It shows in the excellent financial metrics the business achieves. For example, in its fiscal year 2021 (the 12 months to 30 June 2021), it generated a huge operating margin of 42%. What’s even better is that this has increased every year since 2016 (when it was 30%).

One further exciting aspect of Microsoft’s business is the growth in its cloud services. A major part of this is Microsoft Azure, the company’s cloud computing platform that’s used for advanced analytics, storage and networking. In the most recent second-quarter earnings results for the fiscal year 2022, Azure and other cloud services revenue grew by an impressive 46%. I think this is an attractive growth market for Microsoft.

Risks to consider

The US government has concerns over the power of ‘Big Tech’ — the mega-cap technology companies. This presents a risk of tighter regulation for Microsoft, and may therefore stifle its growth plans. For example, the Federal Trade Commission was looking into unreported acquisitions of technology companies, which included Microsoft in its investigation.

Also this month, Microsoft announced it was acquiring Activision Blizzard. Any acquisition comes with risk as there’s no guarantee the two companies will integrate well together. This one in particular will be Microsoft’s biggest acquisition ever, at a value of $68.7bn. I do see this as a good move by Microsoft. However, I still need to monitor how the acquisition progresses given the issues that Activision Blizzard has been dealing with.

A stock market crash could be the opportunity

I view Microsoft as a quality company. But the valuation today is putting me off buying the shares. This is where a stock market crash comes in. I could buy the stock much cheaper if this happens.

As it stands today, the stock is valued on a price-to-earnings (P/E) ratio of 32. I think this is high compared to the historical valuation. For example, the average 10-year P/E ratio has been 23. I’d have to pay quite a premium today to buy it.

On balance, I’m keeping Microsoft at the top of my watchlist, but not buying yet. If there’s a stock market crash, however, I’d snap up some shares for my portfolio.

Dan Appleby has no position in any of the shares mentioned. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK has recommended Microsoft. 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.

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