Warren Buffett, the chairman of Berkshire Hathaway and one of the richest men in the world, has never hidden his most valuable stock market strategies. In this article, I will be using Warren Buffett investing principles to highlight two UK shares that I’d consider adding to my portfolio. I also share a Berkshire Hathaway stock that I’ve held for years.
Buying for the long term
One of Warren Buffett’s key stock market rules I’ve learnt is that I shouldn’t invest in a share without a long-term interest in it. I’m not a trader, I’m an investor.
“If you aren’t thinking about owning a stock for 10 years, don’t even think about owning it for 10 minutes,” is a popular Buffett quote.
With that in mind, I want to invest for the long term in UK shares that have good growth potential. I’m looking for a company with growing consumer demand and a competitive advantage over its competitors (or as Warren Buffett would call it, an ‘economic moat’).
Sustainable consumer demand
Warren Buffett bought shares in Apple many years ago. It’s estimated that Buffett’s stake in the company is now worth around $100bn. The stock market expert has time and time again expressed how important it is that a company can sustain consumer demand. I think Apple has proved that it can do just that. I hold Apple shares, but one downside to it is that it will face competition from newer and cheaper products emerging in the market.
I think one UK share that shows profitable growth in the same way as Apple is ASOS. The British online fashion retailer has reported positive sales growth over the past three years. In its most recent trading statement, it reported 25% year-on-year growth in retail sales. Its consumer base has also increased by 1.2m to 26.1m people.
It’s important to note though, that the fashion industry is very competitive. That was brought home to me when Arcadia, the owner of Topshop, spectacularly failed. ASOS then bought its top brands for £265m and while the integration seems to be going well, picking the wrong trends or buying troubled brands are two risks that come with this stock.
An economic moat
At the 1996 Berkshire Hathaway annual meeting of shareholders, Warren Buffett explained the concept of the economic moat. He said: “We’re trying to find a business with a wide and long-lasting moat around it — protecting a terrific economic castle with an honest lord in charge of the castle.”
He went on to explain that a business can have a economic moat if it’s a low-cost producer, has a particular place in consumers’ minds, or perhaps has a technological advantage.
This is why Dixons Carphone would be my second UK share to add to my portfolio. The company has a strong image with well-known leading brands such as Currys PC World and Carphone Warehouse. It’s also showing strong financials and making the most of the rise of e-commerce, which should help sustain its long-term growth.
Of course, e-commerce is also another sector that’s fiercely competitive. Amazon is one of the major players in this area and there seems to be no limit to its capabilities these days. Dixons will face strong competition from companies like Amazon now and in the future.
