I’m following Warren Buffett and buying cheap UK shares

Our writer explains how he is following the Warren Buffett method to hunt for cheap UK shares he can buy for his portfolio.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Warren Buffett at a Berkshire Hathaway AGM

Image source: The Motley Fool

After decades spent investing in the stock market, Warren Buffett has certainly learnt a few things. Fortunately for me and many other private investors, he is generous with his wisdom.

In fact, it is Buffett’s wisdom I have been following in my approach to buying cheap UK shares for my portfolio. Let me explain.

5 Stocks For Trying To Build Wealth After 50

One notable billionaire made 99% of his current wealth after his 50th birthday. And here at The Motley Fool, we believe it is NEVER too late to start trying to build your fortune in the stock market. Our expert Motley Fool analyst team have shortlisted 5 companies that they believe could be a great fit for investors aged 50+ trying to build long-term, diversified portfolios.

Click here to claim your free copy now!

Warren Buffett on price and value

Like a lot of people, Buffett started out as a “value investor”. Value investors look at a company’s earnings or assets and compare them to the share price. If they see that a company trades at a cheap-looking valuation – for example, the share price is just a few times its earnings per share – they may buy it as a potential bargain.

That approach can work very well. In some ways I still think like a value investor myself. But the approach has problems too. Companies that trade on very low price-to-earnings ratios may do so because the City does not expect them to maintain those earnings in future. For example, a company may have sold assets that mean its future profits will fall.

Buffett left behind pure value investing and instead started looking for deep value, not just focussing on share price. Deep value in this context is about how much profit a company can generate in future. If that number is big enough, the shares can still represent good value even though their price is high.

Looking for a business moat

To understand how a company might do in future, Buffett considers what they have that could set them apart from competitors when it comes to sustainable, substantial earnings streams. This type of competitive advantage is what Buffett calls a business “moat”.

Such a moat could come from a strong brand, for example. That is a key differentiator possessed by two of Buffett’s holdings, Coca-Cola and Apple. A moat could also come from an entrenched user network, as at Buffett holding American Express.

Whatever the source, such moats help companies grow their earnings over the long term. They can create enough value that a share seems like good value to Buffett even if its price is high.

Cheap UK shares

I am applying the Buffett method when it comes to hunting for cheap UK shares for my portfolio.

For example, I reckon Smith & Nephew has a wide business moat because many of its proprietary medical technologies have no immediate competition. Although the pandemic delaying elective medical procedures has hurt sales and profits, I think that will be a temporary blip. The long-term business moat of its technologies should help Smith & Nephew produce strong earnings for years to come.

I think the same is true of publisher Bloomsbury. Books in its Harry Potter series are the golden goose that keeps laying. A unique franchise like that provides a strong business moat, which could help Bloomsbury earnings for many years to come. Indeed, this week the company upgraded both revenue and profit expectations for the year. Potter’s appeal could peter out in future, hurting revenues and profits. But meanwhile Bloomsbury is growing its digital asset base and trying to fortify its business moat. Like Smith & Nephew, I would consider it for my portfolio.

One Killer Stock For The Cybersecurity Surge

Cybersecurity is surging, with experts predicting that the cybersecurity market will reach US$366 billion by 2028more than double what it is today!

And with that kind of growth, this North American company stands to be the biggest winner.

Because their patented “self-repairing” technology is changing the cybersecurity landscape as we know it…

We think it has the potential to become the next famous tech success story.

In fact, we think it could become as big… or even BIGGER than Shopify.

Click here to see how you can uncover the name of this North American stock that’s taking over Silicon Valley, one device at a time…

Christopher Ruane has no position in any of the shares mentioned. American Express is an advertising partner of The Ascent, a Motley Fool company. The Motley Fool UK has recommended Apple, Bloomsbury Publishing, and Smith & Nephew. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

New virtual money concept, Gold Bitcoins
Investing Articles

After the latest ARB share price slide, is it finally time to buy?

The ARB share price has fallen in the face of crypto weakness, but not as far as I'd feared. I…

Read more »

Early morning sunlight filtering through the green foliage of an tranquil forest clearing
Investing Articles

Will Woodbois ever pay a dividend?

Could the prospect of eventual Woodbois dividends make our writer consider the shares for his portfolio? Not yet -- here's…

Read more »

Electric cars charging at a charging station
Investing Articles

As both stocks fall, here’s why I’m buying NIO shares and not Tesla!

NIO shares fell yesterday, but so did stocks in EV market leader Tesla. But here's why I'm backing the Chinese…

Read more »

Renewable energies concept collage
Investing Articles

What’s going on with the SSE share price?

Jon Smith goes through SSE's full-year results and talk of a windfall tax to see how the news is impacting…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

My top growth stocks to buy before June!

Growth stocks, generally, have performed very poorly this year. But amid continued volatility, these are my top picks to help…

Read more »

Playful senior couple in aprons dancing and smiling while preparing healthy dinner at home
Investing Articles

Is the Amigo share price back from the dead?

The Amigo share price is up by double-digits this week after the firm made an exciting announcement. Zaven Boyrazian investigates.

Read more »

Burst your bubble thumbtack and balloon background
Investing Articles

After plunging 40%, is Snap stock a no-brainer buy? 

Snap stock fell around 40% yesterday, due to an update saying it would miss Q2 revenue and profit expectations. Is…

Read more »

Investing Articles

Why growth stocks will continue to fall

With central banks around the world fretting over inflation, and the UK likely to enter a recession, I think growth…

Read more »