Since early 2022, billionaire investor Warren Buffett has been on quite the shopping spree. His investment company, Berkshire Hathaway, has poured billions into the stock market over the last year, making it the most active since the 2008 financial crisis. And it’s not difficult to understand why.
In the last two years, we’ve seen a stock market crash in early 2020, followed by a correction just 12 months later. As avid value investors, Buffett and his team are clearly taking advantage of the buying opportunities all this volatility has created. And following in their footsteps could unlock substantial wealth in the long run.
Investing like Warren Buffett
The FTSE 100 has made an impressive recovery from last year’s volatility. But the FTSE 250 is still in correction territory. And while capitalising on the discounted valuations with an index fund is possible, picking individual stocks could lead to substantially higher returns. Of course, this comes with added risk. So how does Buffett do it?
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Understanding a business and analysing the financial statements is an important step. But it can only reveal so much. After all, any business can look solid on paper. Yet, in the long run, most fail to generate market-beating returns. That’s why Buffett is always on the lookout for competitive advantages.
These unique characteristics give a business the upper hand over its peers and rivals. So much so that, in the long run, they’re able to capture the lion’s share of a target market. And while there is always the risk of disruption, dethroning an industry titan isn’t easy.
Competitive advantages can come in many forms. And some examples include:
- Branding: having a recognised reputation for quality
- Switching costs: being so heavily integrated into a customer’s operations, it becomes uneconomical for them to switch to a cheaper competitor
- Exclusive access: being able to tap into a resource that no other company can access
- Network effects: increase the value of a product or service with each additional customer that uses it
- Market power: set the prices within an industry to maximise profitability
Capitalising on volatility
All too often, the best companies with rock-solid fundamentals and a long list of advantages will carry a lofty valuation. After all, Buffett isn’t the only long-term investor searching for these enterprises. But during a crash or correction, valuations have a habit of plummeting.
When fear leads the decision-making, panicking investors can often sell their stake in terrific enterprises at terrible prices. But those with the know-how and capital can take advantage by buying high-quality shares while they’re cheap. This strategy is the heart of value investing, and it’s how Buffett made his fortune.
That’s why buying UK shares today could be a pivotal moment on an investor’s journey to building wealth. Are there any guarantees? Of course not. Investing is never risk-free. And a poorly constructed portfolio can result in significant losses. But by taking a disciplined and informed approach, an investor could significantly improve their long-term financial prospects.
