Warren Buffett has built his $100bn fortune over the past seven decades using a relatively simple strategy. The ‘Oracle of Omaha’, as he is also known, focuses on buying cheap US shares.
He does not rush into situations, nor does he let the market dictate his actions. He waits until a great opportunity comes along and then acts quickly to capitalise on the market development.
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This is the strategy I am looking to use in the current market. Equities worldwide have been sold off as investors have started to price in higher interest rates. Investors are also becoming concerned about the outlook for the global economy.
I will admit that some US shares look expensive right now. Many high-flying technology companies look especially overvalued. As the world opens up again, I think it is unlikely these businesses will be able to maintain the level of sales growth they have reported during the pandemic.
But on the other hand, the general sell-off is throwing up some interesting opportunities. And it is these companies I would focus on adding to my portfolio, using the approach pioneered by Buffett.
Cheap US shares
The Oracle does not buy a company just because it looks cheap. It must also have a competitive advantage. A stock I have been buying for my portfolio recently is Visa.
This organisation operates one of the world’s major payment card networks, which gives it a robust competitive advantage. It also looks cheap compared to other US shares in the same sector, although its growth is not guaranteed. Challenges it could face include competition and disruption from new technologies.
Another company in my basket of cheap US shares that Buffett already owns is Kraft-Heinz. He helped orchestrate the merger of Kraft and Heinz and holds just under a third of the enterprise today.
The company’s sales have stagnated for several years but began to move higher during the pandemic. In my opinion, I do not think the market is correctly valuing this growth. That is why I would buy the shares for my portfolio right now. Its most considerable risk going forward is rising interest rates, which could increase the cost of the group’s debt.
The final firm I would buy for my portfolio of cheap US shares is Intel. As one of the largest microchip manufacturers globally, I think the company has the sort of competitive advantages Buffett looks for in a business.
However, despite this advantage, the stock looks cheap compared to its peers in the technology sector. With the price of microchips surging, I think the stock would be a great addition to my portfolio, even though competitive forces could weigh on growth if the business under-invests in its potential.