Warren Buffett is used to investing millions of pounds at a time in the stock market. Most of us do not have that privilege. But I think the Warren Buffett method can still be helpful for me even if I am investing much less.
Here is how I would use £100 a month based on lessons from Buffett.
How Buffett started small
Buffett’s method has changed over the course of a very long career. He first bought shares 80 years ago. In his recent Berkshire Hathaway shareholders’ letter he reminisced that he “purchased three shares of Cities Services preferred stock. Their cost was $114.75 and required all of my savings.”
Nowadays, Buffett never concentrates his portfolio in a single share. In an early sign of his stock picking skill, Cities Services thrived and is still in business today as Citgo. But some of Buffett’s investments have turned out terribly. So if investing a small amount, I would follow the Buffett of today — not the Buffett of decades years ago. In other words, I would spread my money over a variety of shares. One way to do that – indeed the way Buffett reckons makes sense for most small investors – would simply be to buy a low-cost fund that tracked a key index like the FTSE 100.
Alternatively, I could use the £100 a month to buy the shares of individual companies. But to do that I would first save it up for a few months before buying. That would give me enough money to be able to diversify, and might also help me reduce the impact of minimum share-dealing charges on my purchase.
Warren Buffett on research
That would also give me time to do research on finding shares that are a good fit for my investment objectives and risk profile.
Buffett takes research very seriously. In fact, it is probably the single biggest part of his typical working day. He has said of his daily routine: “I just sit in my office and read all day.”
Why does Buffett read so much and what has it go to do with his successful track record of picking shares? Companies listed on a stock exchange need to publish certain information on a regular basis, such as their annual accounts. This may not give a full picture of a company’s past performance or future prospects – but it can help me build a detailed view of it. That can help me identify shares that I think may be significantly undervalued compared to their long-term earnings potential, the same way Buffett does.
The power of consistency
Whether using £100 a month or much greater sums, Warren Buffett has developed a clear, consistent investment strategy. I think that can work as well with small sums of money as with much larger ones.
Buffett focuses on finding companies with compelling long-term business prospects trading at an attractive price. That enables him to invest money in them and hopefully benefit from their success. Even with £100 a month, if I can find the right shares to buy, I hope I can do the same.
