Super-investor Warren Buffett has made some very smart moves when buying shares over the years. But something interesting about his approach is that although those moves may have been smart, they have also typically been fairly simple.
The billionaire investor tends not to get involved in exotic, complicated transactions. Instead, he often buys shares in well-known businesses like Apple.
Here is how I am following Buffett’s approach when looking for cheap shares to buy for my own portfolio.
Future focus
Buffett tends not to worry too much about a company’s current performance. Rather, his long-term investment focus means he is looking forward years, or even decades, to see what sorts of industries are likely still to be in high demand. That explains why he invests in businesses such as banks, railways and power infrastructure – he expects those to be around for the very long term.
Choosing winners
But picking an industry with a long life ahead of it does not in itself make for a successful investment. Every industry has winners and losers, after all.
So Buffett tries to choose companies he thinks could be winners within a particular industry. He does this by looking for a company that has a competitive advantage to support future growth. That could be a unique distribution network, like National Grid. Or it could be a unique product formula, like Buffett’s long-term holding Coca-Cola.
Although he is future-focussed, Buffett also tends to look for past performance that proves a company already has been profitable, rather than just having the potential to make money in future.
Warren Buffett looks for value not just cheap share prices
Even having identified such companies, Buffett may still not buy their shares – in some cases for decades. That is because he is looking for good value. That means a great business selling at an attractive share price. Great companies are often in high demand among investors, which can push their share price up for many years.
So Buffett waits patiently. And if a share price comes down to a level he thinks offers him value, he may buy. I can apply the same approach when looking for cheap shares to buy now for my portfolio. Simply by making a shopping list of shares I would like to own, I can be ready to act immediately if a sudden stock market correction pushes share prices down.
Investing not trading
If I found such great companies and a cheap share price made me add them to my portfolio, what would I do next? Like Buffett, I would often simply buy and hold them for the long term.
If a company has great economic characteristics that should allow it to prosper for decades ahead, owning its shares could help me benefit from that success year after year. Like Buffett, I am looking for cheap shares to buy now – and hold.