UK stocks form the core part of my portfolio. And, as far as I’m aware, Warren Buffett‘s only UK-based stock in Diageo.
So it might sound strange when I say I’m listening to Buffett and buying UK stocks. But what I mean is I’m applying his teachings when I’m buying beaten-down British companies.
I’m not just looking at any UK stocks. I’m using Buffett’s methods to help me navigate these challenging markets. So here are three snippets of Buffett brilliance for troubled times.
Buying undervalued stocks
This might sound like a simple one, but it’s core to the value investing strategy Buffett employs.
The so-called ‘Oracle of Omaha’ focuses on buying meaningfully undervalued stocks, not just companies that look cheap because they’re less expensive than they were a year ago.
This means doing my research and working out how much a stock is worth to me. A good place to start is by looking at simple metrics such as the price-to-earnings, price-to-sales, or EV-to-EBITDA ratios.
However, more complex calculations such as the discounted cash flow (DCF) model can be more telling. DCF concerns a valuation method that estimates the value of an investment using its expected future cash flows.
Once we have an idea what we think the stock is worth, we can compare it to the market price. Thankfully, there are several DCF calculators online to help us.
Don’t follow the market
“A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful,” Buffett once said.
Clearly, he doesn’t follow the crowd. And naturally, it can be hard to find undervalued stocks in booming sectors of the market. In fact, the legendary investor thinks we should even sit it out when bull runs occur.
This can be a contrarian perspective, as many investors will feel the urge to jump on the bandwagon as stocks go from strength to strength. Instead, Buffett buys quality stock at prices he’s happy to pay.
It’s also worth noting that Buffett steers clear of distressed stocks. The 92-year-old says he’d rather pay a fair price for an exceptional stock than an exceptional price for a fair stock.
Stick to what I know
Buffett sticks to what he knows and takes very long positions. Naturally, this makes a lot of sense as it can be hard to really assess the value of a stock, or the prospects of sector if I don’t understand it.
This is why Buffett’s portfolio includes many household names such as Apple and Coca-Cola.
What does this mean for me?
UK stocks are out of fashion right now. Investors clearly aren’t piling into the FTSE amid concerns about the health of the economy in the short and medium term.
But with a host of beaten-down stocks to assess, I’m content there are plenty of stocks to buy that match up with Buffett’s teachings.
For me, one such stock is Lloyds. The British bank has been trading at a discount for some time. But with a major tailwind in the form of higher interest rates, and regulatory change that could provide the City with a much-needed boost, I’m buying more.
Some DCF models suggest the stock could be undervalued by as much as 60%.
