Warren Buffett is one of the most successful investors in the world. As CEO of Berkshire Hathaway he was instrumental in achieving a 20% annual return from 1965 to 2021.
That’s a phenomenal performance and track record. It’s almost double the average stock market return.
So how can I learn from this brilliant investor. Thankfully, he’s shared many words of wisdom over the decades.
Nuggets of wisdom
One such nugget is “be fearful when others are greedy and greedy when others are fearful”. Stock markets rise and fall for many reasons. Often, share price movements have little to do with a company’s fundamentals. Rather they can be driven by fear and greed.
Right now, many investors are fearful of a potential recession and rapidly rising inflation. That has caused global stock markets to tumble this year.
For instance, the FTSE All-World index has sunk by 21% in a year.
If others are fearful, maybe I should follow Warren Buffett and be greedy.
Which shares to buy?
But which shares should I consider buying? Buffett doesn’t have a specific list of criteria that he always follows, but he has talked about the characteristics of stocks that he likes.
For example, focusing on profitable and high-quality businesses is preferable to just buying shares that appear cheap. But what makes a quality business? Two measures that are often used are return on equity (ROE) and return on capital employed (ROCE).
Making the right moves
One share that stands out in this regard is property portal Rightmove (LSE:RMV). With a ROCE of over 200%, it’s firmly at the top of FTSE 100 leaderboard.
This online platform is often the first place that house-hunters go to when looking to buy a property. That sounds exactly like the kind of moat — or competitive advantage — that Warren Buffett looks for too.
Its share price has fallen by 29% over the past year amid concerns of recession and a slowing property market. But for such a high-quality business, I’d follow Buffett and be greedy when others are fearful.
In the short term, with rising interest rates, the UK property market could slow further, which could put pressure on Rightmove’s share price. But as a long-term investor, I’d buy these quality shares for my Stocks and Shares ISA.
A niche business
My next share to buy using Buffett’s approach is fantasy miniatures company Games Workshop (LSE:GAW). This is a high-quality, profitable business with growing earnings, strong cash flow and a rock-solid balance sheet.
It operates in a niche market and has a strong competitive advantage as its business is difficult to copy.
Although it’s far too small for Berkshire Hathaway, I’m confident that Warren Buffett would be a fan of this business.
A word of warning, however. If the cost of living continues to rise, it could impact discretionary spending. That could include the premium models that Games Workshop sells.
That said, its share price has already tumbled by 45% over the past year, making it an attractive option, in my opinion. I’d happily buy these shares today for my long-term portfolio today.