Warren Buffett and Terry Smith have excellent track records at outperforming the stock market over a long time period. Their investment styles are focused on the quality of a company, rather than seeking to predict economic growth or try and second-guess investor sentiment.
This strategy could be a sound starting point for investors who are seeking to find the best UK shares to buy today. It may enable them to cut through the political and economic challenges faced right now to prosper from a likely stock market rally in 2021 and beyond.
Warren Buffett and Terry Smith’s focus on quality
Warren Buffett and Terry Smith have historically sought to buy companies that have a competitive advantage over their peers. For example, a business may have a unique product that cannot be easily replicated, or it may have a high degree of customer loyalty that allows greater margins than its peers.
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While identifying a competitive advantage is naturally very subjective, figures such as a company’s return on equity or return on invested capital provide evidence of its wide economic moat. There are many variations of such formulas, but essentially they provide an investor with guidance on how much ‘bang for their buck’ a company provides.
Focusing on fundamentals to find the best UK shares to buy now
Businesses with long track records of high and consistent returns on capital are likely to pique the interest of Warren Buffett and Terry Smith. Unlike other investors, however, they do not pay too much attention to the economic outlook. In fact, Buffett has historically preferred to invest when the economic outlook is weak, while Smith seems to place little emphasis on economic forecasts.
As such, they seem content to buy companies with competitive advantages, whatever the economic outlook. This could mean that the best UK shares to buy now are those businesses with substantial competitive advantages, but that trade on relatively attractive valuations because of an uncertain economic outlook. They may be able to generate impressive returns in a likely long-term stock market recovery.
Diversification to reduce risk
Warren Buffett and Terry Smith have historically run relatively concentrated portfolios. While this means they only invest in their best ideas, it can lead to relatively high volatility.
As such, investors may wish to ensure they build a diverse portfolio of UK shares that includes companies operating in a variety of sectors and regions. This may help to reduce overall risks in what could prove to be a challenging economic and political environment in 2021. It may also lead to more impressive returns, since an investor can gain exposure to a range of businesses that may benefit from a likely stock market recovery after the 2020 stock market crash.
