Warren Buffett knows a thing or two about investing. He bought his first stock when he was only a teenager, and since then he has accrued a multi-billion pound fortune by investing in the stock market.
Throughout his career, he has used a relatively simple investment strategy. He has acquired undervalued equities and then held on for as long as possible or until they no longer look cheap.
Anyone can use this investment approach. Indeed, based on Buffett’s track record, it appears that by doing so, one may be able to achieve large investment returns from the stock market. And it’s the approach I would use if I had to invest £10,000 today.
The Warren Buffett method
Buffett or the Oracle of Omaha as he is sometimes known, doesn’t just target cheap stocks. He wants to buy high-quality businesses, that have a strong track record of creating value for investors.
I think a handful of London-listed businesses fit his investment strategy. A.G. Barr is a great example. This soft drinks company has higher than average profit margins and has a good track record of reinvesting profits back into operations to drive growth. It also returns excess cash to investors with share buybacks and dividends, and the balance sheet is not overloaded with debt. I see similarities between this business and Coca-Cola, which has long featured in Buffett’s portfolio.
Another stock that I think qualifies as a Warren Buffett type of investment is Games Workshop. The tabletop gaming business has high returns on invested capital, fat profit margins and a clean balance sheet. It also has a relatively defensive business model because it has no competitors. The company’s products are unique, and this puts it in a strong competitive position. Other firms may launch new games to try to steal customers, but they won’t be the same. In my opinion, that gives Games Workshop a substantial advantage, although we can’t ignore the risks of any future rivals finding a more appealing formula.
Diversified fund
If I felt really lazy, I could replicate the Warren Buffett method without picking individual stocks by buying a fund like the CFP SDL UK Buffettology fund. This seeks to invest in companies that exhibit the qualities outlined above. There are 58 holdings in the portfolio overall, and the largest is Games Workshop.
Usually, I’m wary of investing in active funds because they can be an expensive way to invest. However, with this one, I’d be happy to pay its annual management charge of just under 1.2% based on its historical returns. The fund has doubled investors’ money over the past five years, more than doubling its benchmark index’s performance.
In my opinion, its track record shows just how lucrative a Warren Buffett-style strategy can be, and that’s why I’d follow the Oracle’s approach when investing a large lump sum.