Investor Warren Buffett has spent decades hunting for cheap shares. He has certainly learned a thing or two. Here is how I would apply techniques from the Warren Buffett method in my own hunt for cheap UK shares to buy for my portfolio.
Price and value
What makes a share cheap? To Buffett (and to the The Motley Fool), cheapness is not just about price. He reckons that “price is what you pay, value is what you get”.
In other words, a cheap price alone does not make a share attractive to Buffett. First he tries to find companies he thinks have the ability to generate profits for years to come. Typically they will have some competitive advantage, such as the secret formula of Coca-Cola or the installed user base of Apple. When he finds such businesses, he may consider buying a part of them — by purchasing shares.
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At this point, he considers the company’s share price. If he can buy shares in what he regards as a great company at an attractive price, Buffett may have found the value he wants.
Keeping things simple
The two companies I mentioned already have fairly straightforward business models. In fact, that is typical of most of Warren Buffett’s portfolio. He likes to own shares in companies with a strong position in an industry that is not too complicated for him to understand.
In the UK, there are loads of shares I could buy in quite complex industries, from biotech to AI. But I do not bother with them, as I reckon I can find cheap shares to buy now for my portfolio in simpler industries with proven, profitable business models.
For example, lately I have been buying JD Sports. It has reported record turnover and profits. Its brand gives it a competitive advantage. I think its business model is easy for me to understand, including some of the risks it faces such as the withdrawal of consumer stimulus in the US hurting revenues and profits. After falling 15% in the past year, I regard this as a great company at a good price for my portfolio,
The Warren Buffet method involves patience
The stock market tends to go through cycles. Individual shares do not always move in the same way. But they do go up and down in price over time.
Part of the key to finding cheap shares to buy is simply having patience. The Warren Buffett method can involve waiting for many years before investing in something. He may identify a company he likes, but simply keep it on a watchlist in case its share price becomes more attractive to him in the future.
The same is true for me when looking for cheap UK shares for my portfolio. There are companies I would like to own, such as Diageo and Victrex, but their share prices at the moment reflect hot demand for them from fellow investors. If I am willing to be patient like Buffett, I expect some of these great companies to become available to me in future — at what I see as attractive prices.
