Warren Buffett’s approach to investing in stocks is different to the theories and strategies followed by 99% of investors. So said Mary Buffett and David Clark in their 2012 book The Warren Buffett Stock Portfolio.
Buying the cream of the crop
According to the book, Buffett’s methods are opposite to the herd. That’s because when others are rushing to sell stocks, he will likely be buying — selectively. But he’s only buying “the cream of the crop”. And that means those companies with a durable competitive advantage.
The book explains that when everyone is counting their riches after a bull market, Buffett can often be found abstaining from buying stocks. Instead, he’s usually building up a pile of cash and waiting for better conditions before he spends it on new shares. And that means he’s waiting for lower valuations to make better sense of a long-term investment in any business that catches his gaze.
The book cites an example from the lips of Buffett himself. In 1990, financial services company Wells Fargo‘s stock plunged by almost 50% after he’d already been buying the shares. He reckons the fall occurred because everyone feared a California real estate “disaster”, similar to the one experienced in New England.
Buffett’s reaction to the plunge? He said: “We welcomed the decline because it allowed us to pick up many more shares at the new panic prices.” And he added that investors expecting to invest throughout their lifetimes should “adopt a similar attitude toward market fluctuations.”
An opportunity could be unfolding
And I reckon we could be seeing an opportunity to adopt Buffett’s counterintuitive buying habits right now. I’ve been hearing investors talk about their portfolio declines so far this year and many shares have moved lower.
Of course, there’s plenty to worry about. Think the war in Ukraine, rampant inflation, the potential for a recession and the cost of living crisis. But such worries tend to create the conditions for shares to become unpopular — just the times that Buffett often buys them.
So with £3,000 to invest, I’d start searching for selective shares right now. Buffett is well known for focusing on the quality of an enterprise, its potential to grow operations, and the strength of its business economics. And I’d aim to identify that such qualities are present before considering the valuation.
There can be no certainty of a positive investment outcome even if I follow Buffett’s strategy. All shares carry risks as well as positive potential because the underlying businesses can face operational challenges at any time. However, my watchlist has several promising names. These include packaging and paper company Mondi, global luxury goods retailer Burberry, and branded food company Premier Foods.
I think it’s a good time to dig into these opportunities with further research with a view to me buying some of their shares to hold for the long term.