Forget gold! I’d start investing in dirt-cheap FTSE 100 shares to build wealth

Can I build my wealth by buying gold and hoping the price goes up? perhaps. But I didn’t do that. Gold is not a productive asset. However, if I wanted to build wealth from scratch now, I would start investing in quality companies that sell at low prices. Let me explain the elements of that approach.

Build wealth from scratch

In order to increase your financial resources from scratch by buying shares, several things must happen.

First, I had to put money down to buy the shares. That could be a lump sum upfront, or I could drip-feed money on a regular basis. But one way or another, I must have some funds to invest.

Second, I need to buy stocks that are going up in value, paying dividends, or both. In the long run, this will hopefully help me grow wealth from the money I invest.

Invest in high quality companies

So should I buy a stock just because I think the price will continue to rise or the dividend yield is high?

I will not do that. Stocks are a small part of a business. I prefer to buy or sell based on what I expect the long-term performance of the business to be, not just the momentum I see in the stock price movement.

As a result of dividends, if the business becomes less successful, it may not be able to pay the dividends. So, again, my focus is on the quality of the business and how I expect it to perform in the coming years and decades.

Buy cheap stocks

But like a quality car or a dream vacation, paying too much even for something attractive can mean it’s not a bargain. If I paid more for the stock, it might be a bad investment, even if the company has strong prospects.

That’s why I focus on value when buying stocks. Take FTSE 100 engineer Spirax-Sarco precedent. I have a very good business with strong prospects. But I wouldn’t buy shares in the company for my portfolio at the current price.

With a price-to-earnings (P/E) ratio of 37, the stock looks expensive to me. They have fallen 23% in the past year, although the company’s latest annual results recorded a 35% increase in basic earnings per share and a 54% increase in profits, this time 15%.

However, I prefer to buy shares in large companies that are trading at what I think are attractive prices. This is one of the ways I work to build wealth.

For example, retailers B&M it has a P/E ratio of 11, making it more competitively priced on that metric than Spirax-Sarco. Admittedly, the business’s recent performance has been less impressive than the engineer’s. But I see B&M’s strong brand, large customer base and retail experience as key growth drivers. Revenue in the most recent quarter was up 12.3% compared to the same period last year.

If I had spare cash and had never bought stocks before, I would start investing in companies like B&M that I felt combined excellent business prospects with attractive valuations.