How I’d apply the Warren Buffett method to buying shares

Learning from billionaire investor Warren Buffett, our writer explains his own approach to investing in shares for his portfolio.

Warren Buffett at a Berkshire Hathaway AGM

Image source: The Motley Fool

Billionaire investor Warren Buffett has a stellar track record when it comes to finding shares to buy. He has also made some colossal mistakes in his time.

Fortunately for us, he doles out his investing wisdom in a way that shows he has learnt from his mistakes as well as his successes. In fact, if I wanted to find the best shares to buy at the moment, this is how I would go about it using some Buffett wisdom.

Shooting for the stars

In his annual letter to Berkshire Hathaway shareholders this year, Buffett had the following to say about the company’s large share portfolio: “one advantage of our common-stock segment is that — on occasion — it becomes easy to buy pieces of wonderful businesses at wonderful prices”.

What strikes me most about that sentence is the way the Sage of Omaha uses the word “wonderful” not once, but twice. Buffett is looking for wonderful businesses, which already narrows the search considerably. But he is also looking to buy them at excellent prices.

That makes it even harder for him to find what he wants. The world has a limited number of outstanding businesses – and their share prices are often expensive, not cheap.

Warren Buffett on patience

So, what does Buffett do if he cannot find amazing companies at excellent prices?

Nothing. Literally. He takes no action – sometimes for years on end.

His company ended last year with a record cash pile, because Buffett said it had found “little that excites us”. We have been here before at various points in the Oracle of Omaha’s long career. He has sat on large sums of cash year after year simply because he did not find any investment opportunities he thought were wonderful.

That, I think, is a vital lesson for me when looking for the best UK shares to buy.

Wait, then act at scale

When Buffett finds what he sees as an outstanding opportunity, he tends to go into it in a big way. As he explained: “When we get the chance to do something that’s right and big, we’ve got to do it. And even to do it in a small scale is just as big of a mistake almost as not doing it at all.”

Rather than acting often on what look like good opportunities, I think my returns would be superior if I invested less often — but only when I found what Warren Buffett would describe as wonderful opportunities. If a company really has a great business outlook and its shares are compelling value, I try to make the most of the opportunity.

Like Buffett, all investors make mistakes. So I always invest in a variety of companies, no matter how appealing one opportunity may seem. But Buffett focuses on waiting for outstanding businesses on sale at an attractive price instead of letting money burn a hole in his pocket. I think doing something similar could help me aim for better investment returns.

It does not mean I will sit in cash for years, it means I will think much more carefully about what I do buy.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be considered so you should consider taking independent financial advice.

Christopher Ruane has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

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