Mighty oaks grow from little acorns. That can be seen from the investing career of Warren Buffett. The legendary share buyer started from scratch. But he has built a fortune of billions of dollars while following some straightforward investment principles.
Even if I had never made a move in the stock market before, I would be happy to start investing today by applying some of the principles employed by Buffett. The good news is that I do not need a lot of money to do so. Here is the approach I would take if I had a spare £800 to invest.
Find quality businesses
Buffett’s investing is centred around buying into quality businesses with outstanding long-term commercial prospects. To do that, he looks for business models that offer some unique competitive advantage in a market with enduring customer demand.
Take Buffett’s holding in Coca-Cola. Demand for soft drinks is resilient – and only Coca-Cola has the recipe for its namesake drink. That gives it pricing power.
I could buy Coca-Cola for my own portfolio. But I could also look at various British soft drinks makers listed on the London Stock Exchange that each benefit from some proprietary formula of their own. Examples include Irn Bru maker AG Barr, Britvic and Vimto manufacturer Nichols.
Buffett diversifies
But Buffett finished building his Coca-Cola stake back in 1994. At that point, the Coke share price was very different to today.
Why has Buffett not bought since 1994? After all, he likes the shares enough to have held them for decades.
I do not know the answer for sure. But several of the possible reasons could help me as I make my own investing choices.
One is diversification. Buffett is smart enough never to put all of his stock market eggs in one basket — even Coke. I do the same. £800 is enough to let me diversify across a few different shares.
Focus on value
Buffett is also keenly aware that building wealth is not just about investing in great businesses.
The price paid also matters – a lot. Even a great company can make a lousy investment if I pay too much for its shares.
So, like Buffett, I aim to buy into great businesses – but only when their shares sell at an attractive price.
Long-term mindset
Buffett’s Coke investment reveals another theme that runs through much of his methodology. He takes a long-term approach to investing.
Given what he is buying, I think that makes perfect sense. With stakes in great businesses bought at a good price, time ought to be the friend, not enemy, of his investments.
For example, Buffett’s firm now receives 54% of the price it paid for its Coke shares every year just in dividends. Coke has raised its dividend annually for over six decades.
Dividends are never guaranteed. But if Coke’s business stays strong, Buffett’s smart investment could see him keep earning more in annual dividends without buying a single additional share in the company.
That illustrates the power of long-term investing in brilliant businesses.
