I think these could be three of the best cheap dividend stocks to buy right now. Here’s why I’d snap them up in 2022.

A FTSE 100 dividend star

I believe National Grid’s (LSE: NG) an ultra-attractive dividend stock as rocketing inflation and Covid-19 threaten economic growth. Sure, central bank rate rises in response to soaring prices could cause the FTSE 100 firm’s debt servicing costs to jump.

But I think the essential nature of its services — National Grid has sole responsibility to keep the UK’s power grid up and running — makes it a good pick for these uncertain times. It can expect earnings to remain stable, regardless of broader economic conditions.

I also like National Grid’s drive to expand its asset base in Britain and the US by 6%-8% each year. This could give profits and, consequently, dividends an extra shot in the arm. Today, the company’s dividend yield sits at a meaty 4.8%. And at current prices, National Grid trades on a forward price-to-earnings growth (PEG) ratio of 0.5. A reading below 1 suggests a stock could be undervalued.

Taking care of business

I also reckon Impact Healthcare REIT (LSE: IHR) could be a brilliant buy for me as Britain’s population rapidly ages. Demand for the sort of care homes it operates is therefore soaring and, as a consequence, so are rents. Buying property stocks like this could be a good idea as the rents it charges will rise alongside broader inflation. This dividend stock also trades on a price-to-earnings (P/E) ratio of just 10 times. It carries a chunky 5.6% dividend yield to boot.

Changes to the government’s social care funding could have a significant impact on future profits. Though it’s my opinion that this risk is baked into Impact Healthcare’s low share price. I like the company’s commitment to acquisitions to drive future profits. In December, it shelled out almost £52m to acquire a portfolio of 15 care homes across Scotland and Northern Ireland.

I’m also pleased by Impact Healthcare’s classification as a real estate investment trust (REIT). This means the firm’s obliged to pay 90% of annual profits to shareholders by way of dividends.

8.2% dividend yields!

I think Direct Line Insurance Group (LSE: DLG) could be another useful stock to own if the economy goes sideways. History shows us that consumer spending on general insurance products remains remarkably resilient, even when broader consumer spending comes under pressure. And this UK share can expect demand for its home, motor, pet, landlord and other insurance services to remain solid.

The only fly in the ointment is the potential for subdued revenues and higher claims at its travel divisions if further coronavirus-related lockdowns come down the pipe. I’d still buy Direct Line though because of its low price and massive dividend yield. The latter sits at a mammoth 8.2% while the insurer trades on a P/E ratio of around 10 times for 2022.

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.

Airlines have been one of the biggest casualties of Covid-19. But the Jet2 (LSE: JET2) share price has outperformed rivals such as easyJet during the pandemic.

I’m a long-time admirer of this package holiday and airline group. My experience as a customer has also been good. Are the shares still a good buy after last year’s stonking recovery? I’ve been taking a closer look.

A market-beating flyer

Covid-19 grounded most of Jet2’s aircraft and forced executive chairman Philip Meeson to raise fresh cash from shareholders. But despite this tough period, Jet2’s share price has risen by 140% over the last five years.

£1,000 invested in Jet2 in January 2017 would be worth around £2,550 today, including dividends. By comparison, the same investment in easyJet would now be worth about £925.

What makes Jet2 different is that the pandemic does not seem to have upset the group’s growth plans. After two years of losses, broker forecasts suggest Jet2 will return to normal trading by this summer. Analysts’ estimates suggest that profits for the 2022/23 financial year could rise to £241m. That’s double the group’s 2019/20 profit of £116m.

At the current share price, these numbers value Jet2 at 11 times next year’s forecast earnings. This modest valuation might normally attract me to a potential investment. But in this case, I’m not sure — for two reasons.

The smart money is selling Jet2 shares

Meeson sold almost £24m of stock in July 2021. In November, he collected another £22m from share sales. Although the Jet2 founder still has a 20% (£535m) stake in the group, these sales suggest to me that Meeson thinks the business is fairly valued at current levels. Given his inside knowledge of Jet2, I take this seriously.

While I expect this business to perform well over the coming year, I can see several potential risks. High fuel costs and tough competition for holiday makers could put profit margins under pressure. There’s also the possibility of further Covid disruption.

Looking further ahead, Jet2 has recently made several large aircraft orders. These will require funding over the next few years. Analysts expect capital spending to increase sharply over the next 18 months.

In my view, Jet2 shares are already fully priced for a return to normal. Although I expect this business to continue growing over the medium term, I’m going to wait for an opportunity to buy the shares more cheaply.

What I’m buying

I reckon there are better investment opportunities away from the regular airline sector. One stock I’ve been buying is small-cap Air Partner (LSE: AIR). This £55m company provides a range of air travel services, mostly related to aircraft chartering.

Business has been good during the pandemic, thanks to higher levels of air freight, including vaccines. The company has also benefited from strong demand for private jet travel from corporate clients and wealthy individuals.

Air Partner’s management admits the cargo boost from Covid-19 is likely to end at some point. Broker forecasts suggest earnings could fall by as much as 20% this year.

As a long-term investor, I’m not too concerned. I think Air Partner’s diverse mix of services should support future growth and profitability. With the stock trading on less than nine times forecast earnings, I recently added more shares to my portfolio.

Roland Head owns Air Partner plc. 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.

The HSBC (LSE: HSBA) share price has a respectable one-year return of 17%. This doesn’t tell the full story though, as the stock still hasn’t recovered from the sell-off in March 2020. You see, before Covid hit, the share price almost touched 600p. Today, the price has only just passed through 480p, but at least it’s made a strong start to 2022.

The shares still look cheap, even after the 7.5% rally so far in January. Let’s dig a bit deeper to see if the shares are a buy for my portfolio.

The bull case

I should start with the valuation. The forward price-to-earnings ratio for HSBC shares is a touch over nine. This looks extremely cheap to me. However, I need to consider the potential for growth before I make a buy decision.

The outlook statement was positive when the company delivered third-quarter results. HSBC said its revenue expectations are improving, with fees growing across most of its businesses. Capturing this upbeat outlook is an estimate for earnings per share (EPS) to grow 148% in 2021. I have to keep in mind this huge growth is from a much lower starting point than in 2020 when EPS crashed over 50% due to the pandemic. Nevertheless, HSBC is still on track to achieve EPS of 70.7 cents this year, which is greater than pre-pandemic earnings.

I also think the income characteristics of HSBC shares are attractive. The current dividend yield forecast for 2022 is a punchy 4.3%. The dividend is expected to grow 12% this year, and a further 21% in 2023. What’s more, HSBC said recently it’s now well placed to step up capital returns to shareholders. Taking into account its growth opportunities, the company said it can now start buying back its shares up to a value of $2bn. A growing dividend and a share buyback programme should lead to attractive returns for my portfolio if I buy the shares.

The bear case

HSBC is a global bank, with key operations in Asia and Europe. The company said all regions were profitable in the third quarter, with Asia contributing $3.3bn of profit before tax, and HSBC UK recording $1.5bn. Therefore, Asia represents a significant proportion of business to HSBC.

Why this matters is because of the ongoing issues with Evergrande, a large property developer in China. Evergrande is struggling to repay its debt right now, and has already defaulted on its interest payments. HSBC may come under pressure from Evergrande’s debt woes, and any further deterioration in China’s property sector. 

There’s also the risk of Covid escalating again. The Omicron strain is spreading globally right now, with further strains of the virus still a possibility. HSBC’s business was heavily impacted at the start of the pandemic, so there’s always a risk of a repeat. Surging inflation may also dampen consumer sentiment and reduce spending, which could also weigh on the bank’s lending businesses.

Should I buy at this HSBC share price?

I think HSBC shares look good at the current price. The valuation is low enough to take into account the risks ahead in my view. The dividend yield is also attractive, and the upcoming share buyback is another positive sign. So for now, I think HSBC is a buy for my portfolio.

Dan Appleby has no position in any of the shares mentioned. The Motley Fool UK has recommended HSBC Holdings. 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.

I have just sold high-performing Glencore (LSE: GLEN), the Swiss miner and commodity marketer. Make no mistake, this is not a sale made in disappointment. This FTSE 100 stock has been one of the best performers in my portfolio. I bought it around the time of the stock market crash last year, when it was trading at pretty abysmal levels. But over the past year the stock has been on a roll. 

Limited upside to Glencore shares

So why have I sold now? It is because I am not convinced there is much more upside to it in the foreseeable future. The past couple of years have been atypical for stock markets, to say the least. Just consider industrial commodity miners. They saw an unexpected windfall in 2020 and well into 2021 because of the heavy (and sometimes profligate) government spending aimed at encouraging growth in the economy during the pandemic. As a result their share prices ran-up even while other FTSE 100 stocks fumbled and fell. 

Pricey compared to peers

However, with spending now being wound down, forecasts for commodity prices have been cut. This is likely to impact Glencore, which has been a beneficiary of the trend. And that, in turn, could quite likely impact its stock price. This is especially so considering that the company trades at an elevated price-to-earnings (P/E) ratio of 36 times at present. This is significantly higher than the 18 times at which the average FTSE 100 stock trades. It is even higher than its FTSE 100 peers’ market valuations. Anglo American, for instance, has a P/E of 7.8 times and Rio Tinto trades even lower at 5.9 times. As a result, not only does Glencore look overvalued to me in comparison to the index, it also looks hugely overvalued compared to its peers. 

As a top-down investor, I like to consider sectors first and then drill down to individual stocks. From that perspective, it was becoming increasingly clear that it would be beneficial for me to reallocate my funds towards Glencore’s undervalued peers instead. Moreover, the miner is a cyclical stock, that has now risen to multi-year highs. Going by this, and the muted outlook for commodities, it seems to me that the stock is more likely to fall than rise further in 2022. 

Further, its dividend yield is nowhere near to that for its FTSE 100 peers. At 2.2%, it is a fraction of the 10%+ yields offered by Evraz and Rio Tinto. It is also less than half of that for Anglo American at 5.6%.

What happens next

There is some upside to the stock though. Analysts, on average, expect that its share price will rise by 8% in the next 12 months, which is far more than the 3% to 4% increase expected for other FTSE 100 miners. It is also possible that its share price continues to rise at an even faster clip if the economy picks up speed, increasing demand for commodities again.

But we really do not know if any of this will happen. I typically like to stay invested in stocks for a longer time period, but I made an exception in this case. I would only buy Glencore shares on a serious dip now. 

Manika Premsingh owns shares in Anglo American, Evraz and Rio Tinto. 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.

Investing fundamentals are the bedrock upon which all successful investors build their strategies. But too often new investors are unaware of some vitally important basics. They get caught up in the excitement of what they’re doing, unaware that they’re only one bad call away from losing a lot of money. I know, because I’ve been there.

News is behind the curve

It’s critical to be informed about current events and what’s going on in the world, but only up to a point. The problem with paying too much attention to the news is that it can lead me to invest reactively rather than strategically, putting me behind the curve.

One of the worst blunders I ever made was purchasing stock in a firm that had recently hit the headlines because its stock price had skyrocketed. Shortly after I did, the price plummeted which was, once again, all over the news. I panicked and sold, only to watch the shares rebound in price. The whole ordeal just raised my cortisol levels and cost me money.

Nowadays, I listen to the news, but I don’t let it drive my decisions.

Investing is a marathon, not a sprint

Two powerful emotions, fear and greed, have the ability to influence everyone in the world. 

When the market falls, fear motivates us to sell, while greed pushes us to buy when prices are at all-time highs. But as shown above, I might as well burn my money if I don’t keep my emotions in check.

What I’ve learned to keep in mind is that investing isn’t about becoming a millionaire overnight. It’s all about long-term wealth creation.

Buying stocks and virtually forgetting about them was the smartest thing I ever did. Prices will continue to fluctuate in utterly unexpected ways for years, but I realised that devoting my days to watching them would just weaken my resolve.

Research the business

The fundamental investing rule I now have is to research a business. It takes little time or effort and that research might be the difference between a wonderful return and a huge loss. Of course, I need to know what I’m looking for, so I ask myself four key questions.

• Does the business provide a product or service?
• Is it costly to operate?
• Does the company have a competitive advantage over similar businesses?
• What’s the profit margin and does it have a lot of debt?

Most of these questions can be addressed by reviewing a company’s financial statements. If I can’t find satisfactory answers, I usually decide it’s not worth the risk.

No one’s making me swing

There isn’t a timeframe to any of this. Investing icon Warren Buffett once compared picking stocks to batting in a baseball game. Bu there’s one important distinction: there’s no one making me swing. This means I can truly think about chances that comes my way and don’t have to actif I’m not 100% sure it’s a smart bet. Ok, I’ve missed out on some excellent investments, but that’s not a problem. There will always be more chances, more opportunities. And when it comes to my hard-earned cash, I’ve learned it’s better to be cautious.

All investment entails risk, but by focusing on these fundamentals, I’ve stopped making the kind of costly mistake I mentioned above.

James Reynolds 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.

My favourite investing strategy is searching for growth shares to buy. Alongside any potential for growth, I also want the company to have an economic moat. The way I check for this is to look for evidence of a competitive advantage.

With this in mind, here are two growth shares with economic moats that I’d buy for my portfolio. They represent two of the best growth shares in the UK today in my view.

A FTSE 100 share to buy

The first company is London Stock Exchange (LSE: LSEG). I consider it as having an extremely strong economic moat due to its near-monopoly over the stock exchange industry in the UK.

So, why has the company got such a big competitive advantage? Well, it already has a large number of big-name companies listed on its exchange. There would be little need for companies to list elsewhere now that they trade successfully on the London Stock Exchange. It’s what I would call a significant ‘switching cost’. This is when a customer (here a public company) wouldn’t go to the effort of switching providers (to a new stock exchange). A switching cost can be monetary, or simply mean there’s just too much effort involved for little benefit.

London Stock Exchange’s profit before tax is expected to grow by 15% in 2022 according to consensus forecasts. This is an attractive growth rate for my portfolio. It would lead to attractive returns as a long-term investment if it can be maintained.

There is a key risk to consider though. London Stock Exchange acquired the financial data company Refinitiv last year. It then guided for increased costs associated with the integration. There’s no guarantee this acquisition will be a success, and costs may rise further. However, if this works out, the company’s economic moat may even widen. I think this is likely, so the stock is a strong buy for my portfolio.

Looking in the FTSE 250

I also view Games Workshop (LSE: GAW) as having an excellent economic moat. In this case, it has an intangible asset base that gives it a competitive advantage.

As a quick recap, Games Workshop is a designer and manufacture of miniature models that are used in a wide array of tabletop games. Hobbyists spend time painting their models, and then battling them against other players.

Games Workshop has spent decades developing the fantasy worlds associated with its miniatures. This has created the substantial intangible asset base that would be very difficult for a competitor to emulate. As such, it’s not just the quality of the miniatures themselves, but the years of evolving rules and stories that come with them that attract and retain a fanbase.

The company is now also building licensing revenue based on its intangible assets. It’s able to sell the rights to use its characters to video games developers. This is very high-margin business for the company, and something I believe will grow significantly from here.

There’s no guarantee that Games Workshop will stay popular in the years ahead though. Potential competition from virtual reality, a new video game, or a competitor in its core field may erode the profits of the company as fans look elsewhere. However, I still consider the shares a buy today for my portfolio.

Dan Appleby owns shares of London Stock Exchange and Games Workshop. The Motley Fool UK has recommended Games Workshop. 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.

The data is in, and unfortunately higher inflation is here. Under normal circumstances, a small amount of inflation is considered good for an economy. But central banks aim to keep that rate at around 2% per year and right now, the consumer price index in the UK suggests that prices are rising at 5%+. That’s the highest seen since 2011. To protect the value of my savings, I need to invest in assets that will either generate a higher rate of income or appreciate in value.

But what options do I have? Some of the safest investments out there are 10-year government bonds. But the current interest rate on these bonds is just 1.4% so I’m not currently considering them. 

Buying dividend stocks

Another option is to build a portfolio based on dividends. These payments are portions of a company’s profits paid to investors over the course of the year. Right now, several FTSE 100 companies are paying staggeringly high dividend yields: 8%, 10% or even 13%. Unfortunately, yields as high as these are often unsustainable over the long term. They won’t be worth much either if the share’s value goes down over time.

Yet I see some higher yields as being much safer. I would add tobacco company Imperial Brands to my portfolio. It pays an 8.5% dividend yield and has remained profitable while increasing revenue over recent years, even as its share price has fallen. IMB shares trade for 1,631p today, down 58% since 2017. There is a risk that the share price could continue to come down as smoking becomes less popular. But IMB has undertaken several cost-cutting measures over the past few years, including exiting all but its five most profitable markets. On top of that, IMB has consistently paid some form of dividend for more than 20 years, even through the pandemic.

I think, as a hedge against inflation, the benefits outweigh the risks for me.

But my portfolio needs diversification. For that, I’d focus on capital growth by investing in a company I think has great potential.

One great penny stock

Penny stocks are companies whose shares trade for less than £1. Most of these stocks don’t have much potential, but there are a few gems hidden among them. I think that one such gem is Idox group, a software engineering company based in the UK. Its shares currently trade for 67.97p, up 34% from this time last year. Right now, Idox builds software platforms for public sector institutions. Most recently it delivered a new data collection/collation system for a Scottish council. If it is able to leverage that success into deals across the country, I can only see the share price rising.

The biggest danger here is the company’s very thin profit margin. Idox is profitable at the moment, but there is a risk that it could fall into unprofitability once again.

Even so, I think the upside potential is worth the risk, and I would definitely add it to my portfolio.

James Reynolds has no position in any of the shares mentioned. The Motley Fool UK has recommended Imperial Brands. 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.

Last week, Apple (NASDAQ: AAPL) became the first company to reach a $3trn valuation. While Apple stock has since slipped back slightly, it remains more expensive than the whole of the FTSE 100 combined. This ascendancy has mainly been due to a series of excellent results, as profits have been able to increase year-on-year. But is this tech stock now in a bubble waiting to burst or has it got further upside potential that I could take advantage of?

Recent results

Apple’s latest annual results clearly demonstrate why it’s the most valuable company in the world. Indeed, net sales reached $365bn, a 33% increase from last year. The rise in operating income was even more impressive, nearly reaching $109bn for the year. This is a 64% increase year-on-year. Therefore, there are clearly signs that growth is continuing at a rapid pace.

Such great results have also allowed Apple to return large amounts of money to shareholders through dividends and share buybacks. As the dividend only yields 0.5%, the main focus is on the share buyback programme. In fact, in the year ending September 25, Apple had made around $86bn of share repurchases, 18.5% more than the previous year. This has the effect of increasing the ownership percentage of each individual shareholder and has therefore been a key reason why Apple stock has climbed so much. There also seems no reason why this share buyback programme will stop, meaning that the share price may be able to climb further.

A valuation perspective

Despite these excellent results, there is no doubt that Apple stock is still expensive. This can be demonstrated by several different valuation metrics. For one, it trades on a price-to-sales ratio of around 8. By comparison, Amazon, another tech company that has seen incredible growth, trades at a price-to-sales ratio of under 4. Apple also has a price-to-book ratio of around 40, while Amazon trades at a price-to-book ratio of just 14. This is partly because Apple has issued a lot of debt for growth over the past few years and has used cash to buy back shares. While this is not necessarily bad, it does show that Apple stock certainly has a premium valuation in comparison to other companies.

Even so, from a price-to-earnings perspective, the current Apple stock valuation looks slightly more reasonable. In fact, in the most recent results, annual earnings-per-share came to $5.67, giving Apple a P/E ratio of around 30. This is around the average P/E ratio for the S&P 500. Considering the incredible growth of Apple, it may, therefore, not be as expensive as it first seems.

What am I doing with Apple stock?

Overall, there is no doubt that Apple trades at a premium valuation, albeit that its P/E ratio is more reasonable. But to buy the best companies in the world, it is often necessary to pay this premium. The company also has several growth plans for the next few years, including the launch of an augmented reality and virtual reality headset and a possible entry into the electric vehicle market. Therefore, I think growth is only going to continue, and I’m willing to pay a premium for the shares as a result. This is a stock I’m very tempted to buy.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Stuart Blair has no position in any of the shares mentioned. The Motley Fool UK has recommended Amazon and Apple. 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.

Finding the best dividend stocks to buy is about much more than near-term yield. As a long-term investor, I’m not just searching for big dividends today. I’m looking for companies whose profits outlook and balance sheet should deliver big, sustainable dividends for years to come.

Here are three top-quality FTSE 100 dividend stocks I’d happily buy right now.

Generally brilliant

Like all financial services firms, Legal & General Group (LSE: LGEN) is highly geared to the performance of markets. Profits can take a dive when, say, share prices crash, and this can, theoretically, pose a threat to shareholder returns.

One thing Legal & General has in its favour is its strong balance sheet however. This could give it the financial strength to continue paying big dividends, even if trading conditions become suddenly troubled. Let’s not forget its Solvency II coverage ratio rose to a healthy 183% as of June.

There’s a lot I like about Legal & General. It’s been around for almost 200 years and has one of the strongest brands in the business. A rapidly-ageing population bodes well for its retirement services division. Poor returns from traditional savings products should keep demand for its investment and services operations bubbling nicely as well.

By the way, for 2022, Legal & General’s dividend yield sits at a fatty 6.4%.

A FTSE 100 share I own

The forward yield at Unilever (LSE: ULVR) by comparison sits at a far-more-modest 3.8%. Still, this is a number I don’t think is to be sniffed at. Besides, for those like me seeking reliable dividend growth year after year, I think this FTSE 100 stock is hard to beat. It’s why I own it in my own shares portfolio today.

Unilever’s got many decades of consistent dividend growth behind it. It’s a testament to the company’s broad stable of essential personal care and household goods labels and their considerable brand power.

These qualities give it terrific earnings stability and, consequently, the clout and the confidence to keep raising dividends. Unilever’s products like Dove soap and Lipton tea are used by a staggering 2.5bn people across the world every day.

Unilever faces intense competition from other major fast-moving consumer goods makers and more local operators. But I’m encouraged by its excellent track record of strong shareholder returns.

Cash rich

I also believe Vodafone Group (LSE: VOD) will remain one of the FTSE 100’s best dividend stocks to buy. Firstly, the telecoms titan is a highly-cash-generative business, which gives it the robustness to pay gigantic dividends.

It has also recently bulked up its balance sheet by selling its European towers business last year. This explains why the yield sits at a mammoth 6.9% for this fiscal year (to March 2022).

Vodafone has plenty of profits opportunities through the steady adoption of 5G technology. It also stands to gain from surging data demand in both developing and emerging regions.

I’m confident these factors should underpin big dividends beyond the current year. That’s even though the highly-regulated nature of its business can throw up unexpected trouble for profits.

Royston Wild owns Unilever. The Motley Fool UK has recommended Unilever and Vodafone. 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.

Following Warren Buffett’s advice, such as being “greedy when others are fearful“, has likely made many private investors very rich indeed. However, I think there’s one tip from the ‘Sage of Omaha’ that doesn’t get sufficient attention, despite being potentially just as useful as all the rest. 

Be “approximately right“

As wealthy as Buffett is, his success has not been the product of perfectionism. Indeed, a quote from the master investor sums this up nicely.

Just 10 words have helped Buffett become a billionaire from scratch: “It is better to be approximately right than precisely wrong.“

For any investor, this seems patently sensible advice. However, the simplicity of Buffett’s tip is something I failed to grasp in my formative years in the stock market. I wanted all my calls to be bang on.

As I’ve come to discover, this is simply impossible. Everyone gets things wrong. Even Buffett has made some awful decisions in his life on the markets, such as an ill-fated investment in FTSE 100 giant Tesco a few years ago. 

The myopic nature of the market is another problem. If a company fails to meet analyst expectations on earnings, even by only a small amount, its share price usually dips. This only really matters if someone is looking to move in and out of stocks. For long-term-focused Fools, it’s all pretty meaningless.

So how do I try to implement Buffett’s suggestion into my own investing?

Using Buffett’s advice

First, I make a point of separating myself from traders that pore over the next quarterly trading statement as if it were the most important thing. So long as a company explains how it is responding to headwinds (if any), a slight shortfall in the numbers doesn’t concern me.

Second, I don’t seek perfection from my portfolio. Instead, I try to ensure that I follow a few basic principles. These include owning a roughly optimal number of stocks, paying what looks to be a good price for shares and getting my risk profile approximately correct according to my age and financial goals.

It’s also not about demanding that my portfolio outperforms the market by a specific amount in a year or, indeed, every year.

Third, I try to select stocks based on a number of characteristics that have, over time, tended to generate excellent investment returns. High-profit margins, a dominant market share and minimal/no debt are examples.

This in no way guarantees me a solid result. That said, it should tilt the odds in my favour. It’s also a better bet than trying to time the market precisely. As a rough rule of thumb, great businesses stay great, even if performance varies from year to year. Poor companies stay poor or don’t survive long enough for us to notice.

Don’t sweat it

Sure, it’s easy to stress the importance of being approximately right when you have already billions in the bank like Buffett. However, I firmly believe that taking his advice to heart has stopped me from a lot of unnecessary rumination in recent years. It’s also come in handy during the last few days of market volatility. 

Real wealth is made by knowing what really matters. Buffett’s tip reminds me not to sweat the small stuff.

Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Tesco. 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.