Investor Warren Buffett has a huge pot of funds to invest. He sometimes laments the difficulty of putting such big sums to work compared to having a small portfolio that would offer more flexibility. So maybe I’m lucky I don’t have Buffett’s problem in that regard!
If I had £3,000 to invest today I’d use Warren Buffett principles in choosing the shares for my portfolio. Here’s what I’d do.
Risk management through diversification
Like Warren Buffett, I’d diversify, buying several different shares as a means of risk reduction. £3,000 is enough to let me invest £1,000 into three different companies, which would offer me a degree of diversification.
I’d probably try to get the tax benefits of investing the £3,000 through buying the shares in a Stocks and Shares ISA. I’d also take my time choosing the shares too. Buffett spends a long time researching and choosing shares to buy. I’d ignore the external ‘noise’ and do the same.
Business moats and strong cash flows
Warren Buffett likes businesses with strong ‘moats’ — basically competitive advantages that are hard for competitors to replicate. He also likes businesses that have the prospect of strong cash flows in coming years and decades. That matters because it shows the business can produce hard money not just accounting earnings. Cash flows are ultimately what fund dividends.
One share Buffett owns, I think, that matches this profile is Apple. Its iconic brand and massive installed customer base should give it a business moat for years to come. In its most recent quarter, the company’s operating cash flows were a massive $104bn. There are risks with Apple, including the danger that an increasingly competitive smartphone market poses to its profitability. But I would happily invest £1,000 in it for my ISA.
Two more Warren Buffett-style shares
Next I would invest in Reckitt. The consumer goods company has many of the characteristics Warren Buffett looks for when choosing shares, including a portfolio of well-known brands that help give it pricing power. The owner of brands such as Finish and Lysol has had a challenging several years due to problems in its infant formula business. Although it has been exiting that business, servicing the debt it took on to buy it some years ago could continue to deflate the company’s earnings in coming years. But I would be happy to buy and hold Reckitt for my portfolio for the long-term.
I’d also consider initiating a position in Lloyds. Warren Buffett likes the cash flows of financial institutions and has been a large investor in US banks. I reckon the strength of the Lloyds brand in the UK, its powerful market position and its cash generation potential bode well for its future prospects. There’s a risk, though, that any economic downturn could hurt profitability if its borrowers default.
Warren Buffett on waiting
Having invested my £3,000, I’d keep an eye on the shares from time to time, but I wouldn’t be constantly checking my position.
Instead, I would sit back, be patient and wait to see how the shares perform in the years to come. In Buffett’s investment approach, patience is a virtue. While I might not match his own investment returns, hopefully using some of his investment principles here would improve my chances of successfully investing £3,000.