Investor Warren Buffett has bought shares in a variety of markets over his career. But his primary focus has always been the US. As he says, “money will always flow toward opportunity, and there is an abundance of that in America”. I focus a lot of my own investment strategy on the UK. But I think the Warren Buffett investment strategy could still help me find appealing shares to add to my portfolio. Here is how.
Investing for the long term
Buffett’s approach is not to worry too much about a company’s latest earnings report or sales figures. Instead, he is trying to identify businesses he thinks have the potential to produce profits over the course of decades, due to sustained customer demand and a strong competitive advantage.
In the UK, I think I can find such companies. For example, engineer Spirax-Sarco is one of the few companies to have raised its dividend annually for over half a century. How has it been able to maintain such a record? It is a manufacturer of precision engineering parts. In such a market, quality matters, so customers are willing to pay a premium price.
By making some parts especially for customers, Spirax-Sarco makes itself their partner of choice when they need parts in future. Buffett himself owns companies with a heavy exposure to such a business model, including Marmon and Precision Castparts.
Focus on value
If I am so positive about Spirax-Sarco, why do I not hold it in my portfolio yet?
Well, there are some risks with the share. In a recession, some companies will postpone non-essential maintenance. That could hurt revenues and profits at the firm. But the main concern I have about Spirax-Sarco is not its risk profile but the company valuation.
Buffett does not always look for cheap share prices. But he does emphasise the importance of buying a great company at a good price. I continue to feel the Spirax-Sarco share price is too high for my tastes. So instead of putting money into it at the current price, I would rather be on the lookout for a dip but also invest my funds in other shares for now.
Even investing in a great business, the price one pays is important. Over the long term, if I buy shares at too high a price I could lose money even if the business continues to perform well.
Warren Buffett investment strategy
So, where else should I look for shares?
The Warren Buffett investment strategy emphasises the importance of staying within one’s circle of competence. In other words, I should focus my search on businesses and industries I understand. That is important because otherwise the chances of me being able to assess a company’s prospects accurately will be reduced.
Once I find a company I understand and think has good prospects, if the price is attractive I could add it to my portfolio. But then what? Buffett’s preferred course of action is actually inaction. He reckons that if a company has attractive business prospects, once he buys it, he ought to hold it for years. Hopefully its commercial advantages will be reflected in the share price more and more over time. When investing in UK shares, I apply the same buy-and-hold logic.