Looking to successful investors for inspiration on how I ought to invest my own funds can make sense. But if I want to invest with a more modest amount, can I really learn from a share picker deploying billions of pounds, such as Warren Buffett? I think the answer to that question is yes. Here’s how I would go about it.
Buffett’s success is built on approach, not amount
Buffett didn’t start his investing career with a lot of money. In fact, it began with what he scraped together as a schoolboy from part-time jobs such as a paper round. So while he may now have a large asset base to deploy, that wasn’t the basis of Buffett’s original investment success. Rather, it was the approach that he took to investing.
Fortunately for me, Warren Buffett has laid out that approach very clearly and openly. In his annual shareholders’ letters (available free online) and public pronouncements, Buffett has laid out how he approaches investing. While I may not attain his results, I can certainly follow his method if I choose.
Warren Buffett on investing
Buffett has said multiple times that for most investors, he thinks the smartest shares to buy are low-cost tracker funds.
Why does he like them? It can be hard for individual investors to outperform the market – and that includes professional stock pickers too. Add in portfolio managers’ fees and it is even more challenging for them to offer strong returns. Some will return less than a tracker fund, which simply mirrors a leading index, such as the FTSE 100.
So a low-cost tracker fund can offer the diversification and broad-based exposure of an index, without the sometimes punitive fees of an active portfolio manager.
But while Buffett reckons most investors would do better to invest in such a fund than pick individual shares themselves, that doesn’t mean they all would. After all, much of Buffett’s success has been down to his ability to pick shares to buy. He reckons some investors can outperform index funds. That could apply even with £1,000 – as long as one made the right choices in picking shares. I say “shares” because more than one company helps to improve diversification. That is important as a risk management principle whether investing £1,000, or billions like Buffett.
Shares I’d consider with £1,000
Buffett likes companies with a wide business “moat”, in other words a sustainable competitive advantage which can help them generate free cash flow for years to come. He only invests in businesses he understands. He avoids companies with red flags such as unusual accounting methods.
One share that I think matches those criteria and that I would consider adding to my own portfolio is consumer goods giant Unilever. Its iconic portfolio of premium brands gives it pricing power. One risk is inflation of ingredients costs cutting into profit margins.
Another share I’d consider buying for my portfolio using Buffett principles is Buffett’s own biggest holding, Apple. I reckon its installed base and ecosystem give it sustainable pricing power, which can translate into large future profits. But one risk is increased competition in smartphones, which could lead to lower revenues. With £1,000 in my portfolio, I’d be happy to split it between Unilever and Apple.