Warren Buffett has a straightforward method when it comes to investing. Buy good businesses, use the earnings they generate to buy more businesses, and repeat.
It’s a simple method that has been devastatingly effective for the Berkshire Hathaway CEO. Over time, the Oracle of Omaha has amassed a net worth in excess of $103bn.
For context, that means that Buffett’s personal net worth is greater than the combined market value of Kellogg, International Consolidated Airlines Group, Sainsbury, and JD Wetherspoon. Twice over.
I’m aiming to follow Buffett’s approach in my own investing in my Stocks & Shares ISA. Using the full tax-free allocation involves investing around £1,600 each month.
My plan is to invest in strong businesses and use the earnings they generate to buy more businesses, just as Buffett does.
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Predictability
At the 1999 Berkshire Hathaway shareholder meeting, Buffett emphasised the importance of focusing on predictable businesses. This is an important part of his investment method.
A predictable business, for Buffett, is one that is unlikely to change much. In other words, Buffett looks for businesses where the future likely resembles the present and the past.
This is why Buffett invests in businesses like Coca-Cola and Kraft Heinz. These are companies that enjoy strong demand for their products and this is likely to continue for some time.
Contrast this with companies Tesla and Palantir. These businesses aim to benefit from the world changing in various ways.
Predictable businesses like Coke sometimes don’t have the kind of growth potential that more disruptive companies like Tesla do. But this isn’t always the case.
The largest holding in Berkshire Hathaway’s stock portfolio is Apple. Since Buffett began buying Apple shares in 2016, the company has more than doubled its earnings per share.
Sticking to predictable businesses doesn’t always mean missing out on impressive growth. But Buffett has a strong preference for businesses that are resistant to change, rather than disruptors.
2 stocks I’d buy with £1,600
Following Buffett’s approach, I’d buy two stocks right now. The first is Starbucks and the second is Colgate-Palmolive.
Whatever the future looks like in terms of renewable energy, gene editing, or cryptocurrency, I think that people will still drink coffee and brush their teeth. This makes these stocks attractive to me.
The risk with both of these businesses is that switching costs are low in both cases. Getting coffee from a local artisan shop, or changing toothpaste brands isn’t difficult for customers.
This has always been a risk with these companies, though, and they have survived well to this point. That’s why I think that they offer a predictable income stream going forward – the kind that attracts Warren Buffett.
With that in mind, I’d invest my £1,600 evenly in shares of Starbucks and Colgate-Palmolive. By using the earnings they produce to buy more businesses, I’m hoping to compound my net worth over time.