No savings at 40? I’d buy UK stocks to build wealth and earn passive income

Is 40 too late to start investing in UK stocks? Absolutely not – Henry Singleton managed to amass a net worth of around $750m and he only started at the age of 44.

According to Warren Buffett, Singleton was one of the best capital allocators of all time. But his approach is one that even an ordinary investor like me can follow.

The Singleton strategy

Singleton’s investing success came from acquiring other businesses. Like Buffett, he did this by building a conglomerate – a collection of smaller businesses – called Teledyne.

Ultimately, the key to Singleton’s approach comes down to a familiar strategy. It involves buying companies when they’re trading at low prices.

During the 1960s, shares in Singleton’s company traded at high price-to-earnings (P/E) ratios. As a result, he used the stock to acquire companies trading at lower multiples.

This caused the Teledyne share count to rise. But buying companies at lower P/E multiples caused earnings to grow more quickly.

Shortly after, a couple of other conglomerates missed earnings. This caused the price of Teledyne shares to start falling.

At that point, Singleton started aggressively buying his own stock. The result was a business with a lower share count and much much higher earnings power.

This is what caused Singleton’s net worth to explode upwards. And I think a similar strategy is the way to go with UK stocks.

Stocks to buy

So how would I go about following that approach with UK stocks today? There are a few places to look for stocks trading at low multiples.

One obvious sector is banking. With uncertainty around the sector, shares in Lloyds Banking Group and Barclays both trade at single-digit P/E ratios and have some attractive dividends.

These stocks come with risk – Warren Buffett recently said he’s uncertain about the outlook for US banks. But I’m inclined to think there’s a lot of risk priced into UK bank stocks right now.

Rising interest rates have been slowing mortgage demand and causing house prices to fall. As a result, shares in Redrow and Taylor Wimpey look cheap at the moment.

A prolonged recession in the UK with interest rates staying higher for longer is likely to be a headwind. But again, I think this is reflected in the price for both of these stocks.

There are also some areas to avoid at the moment. With a P/E ratio of 41, shares in Halma look expensive to me at the moment and the same is true of Spirax-Sarco Engineering at a 37 P/E.

Following the Singleton approach, these are the shares an investor might be looking to unload to get better value elsewhere. They’re great businesses, but expensive at today’s prices.

Getting started

Whether it’s building wealth or earning passive income, time is always an advantage. But, as the case of Henry Singleton shows, it’s not too late to start at 40. 

Henry Singleton’s success was the result of an uncommon amount of skill and a bit of good luck. But while there are no guarantees, I think his approach has the best chance of doing well.