Billionaire investor Warren Buffett has had a very successful investing career. But while he is operating at the top table, a lot of the techniques he uses can work on a more modest scale.
In fact, Buffett has said it was easier for him to do well when he was investing smaller amounts than now, as there was a wider pool of small-scale opportunities open to him.
If I had a spare £800 and wanted to start investing today using some of Buffett’s approaches, here is what I would do.
No rush to invest
Buffett is a patient investor and can wait years, or sometimes even decades, for the right opportunity to come along.
So his approach is not to let cash burn a hole in his pocket. Rather, he waits until he finds what he regards as a good investment at an attractive price before investing.
Staying diversified
The biggest holding in Buffett’s portfolio, by some distance, is Apple. But although the tech giant has a large role, Buffett has a diversified portfolio. That helps reduce the risk posed by one company performing disappointingly.
I would do the same. Even with £800, I could spread my funds over three or four different shares.
Focus on quality
Like many investors, Buffett started his career by looking for value shares. Those are companies that are trading cheaply. Often, that is because of some shift or event that has hurt the business but from which it may eventually recover.
But, as Buffett learnt, price and value are not the same thing. A share that looks improbably cheap may be priced that way for good reason.
So he shifted his investing approach to trying to find great businesses. To illustrate, consider his holding in Coca-Cola (NYSE: KO). The market for soft drinks is huge and it is likely to stay that way. It can also be very lucrative as the cost of production is fairly low.
By developing a unique formula and well-known brand, Coca-Cola has set itself apart from rivals. It has strengthened this advantage by developing an extensive worldwide distribution network.
As a smart investor, Buffett knows that all businesses face risks. Coca-Cola continues to grapple with unpredictable price increases for things like packaging and ingredients, while growing health consciousness has reduced the appeal of sugary drinks in some markets.
But the company remains a solid business performer. It is consistently profitable and has raised its dividend annually for over half a century.
The importance of valuation
But Buffett has not bought a new share in the company for decades. His investment approach is not just about buying into great companies. It also involves doing so when their shares sell at an attractive price.
Valuation matters because it affects the long-term results from an investment. Overpaying can mean that even a brilliant company makes a miserable investment. That is why it is important to find the right companies – at the right price.
