Famous investor Warren Buffett has had some spectacular successes when it comes to buying shares. But he also has far greater resources at his disposal than most private investors.
That is why, even if I was investing just £500 today, I would apply the five Buffett moves below.
1. Focus on the long term
Buffett says that if you are not willing to hold a share for 10 years, you should not even consider holding it for 10 minutes.
That does not mean you need to hold it for a decade or more in practice. But it underlines that Buffett is a believer in long-term investing, not a speculator hoping to benefit from short-term price moves. He looks for a long-term investment case when considering shares to buy.
2. Stick to what you know
Buffett only invests in industries he feels he understands. That helps him assess the prospects for a business, which can form the basis of an investment decision.
Instead of chasing some hot new thing I do not understand, I would prefer to do what Buffett does and stick to an industry I understand when choosing shares for my portfolio.
3. Look for a long-term competitive advantage
£500 may not sound like very much to invest. But one of the joys I see of investing in the stock market is that even with a modest stake, I can own a little piece of some of the world’s leading companies.
When investing, Buffett looks for companies that have a competitive advantage he thinks can last. That is important because it gives them pricing power. Examples from the Sage of Omaha’s portfolio include blue-chip companies including Apple with its strong brand and user ecosystem as well as Coca-Cola, thanks to its proprietary formula.
4. Focus on value
For Buffett, finding a great business is not enough on its own. He wants to invest only at an attractive price. Otherwise, although a company may do well, its shares can actually be a disappointing investment.
Buffett does not simply look at price. He considers the value an investment opportunity offers him. I think that is as relevant a lesson when investing hundreds of pounds as it is when working with millions.
5. Diversify
Buffett spends a long, long time trying to find great companies whose shares he can buy at an attractive price. Even then, he sometimes gets it wrong.
That is why he diversifies across a range of shares. £500 is enough for me to do the same, for example investing £250 into two companies.
Learning from Warren Buffett
I notice that a lot of people try to make investing sound very complicated. It does not always have to be. Buffett has been successful following a very-well-thought-through but fairly straightforward approach to investing.
Rather than reinvent the wheel, I am happy to apply these five lessons from a proven master to my own small-scale investing.