With £500, I’d use the Warren Buffett method to find cheap shares

The legendary investor Warren Buffett has become a billionaire by following some key investment principles. Our writer explains why he would do the same even with far less to invest.

Warren Buffett at a Berkshire Hathaway AGM

Image source: The Motley Fool

The billionaire investor Warren Buffett has a lot of money he can put to use in the stock market. But many of us are in a very different position. However, I still think the investing approach of the Sage of Omaha could help me when it comes to finding cheap shares to buy. Here is how I would go about it with a spare £500 to invest right now.

Spreading my choices

Buffett has had some spectacular successes with shares over the decades. But he has also made big mistakes.

That helps explain why, no matter how much he likes one company, Buffett always makes sure his portfolio contains a variety of different companies drawn from a range of industries. I would do the same with £500, splitting it evenly across a couple of different companies.

Cheap shares

For Warren Buffett, cheapness is not just about the price he pays for a share. It is about the gap between what he pays and how much he thinks a share is really worth.

To judge that, he looks at what he sees as the future prospects for a business. For example, does it sell products or services that will likely stay in strong demand? Does the company have some competitive advantage that can help it be profitable year after year?

This can be illustrated by Buffett’s investment in Coca-Cola. The market for drinks is likely to remain strong, even if the popularity of specific drinks may change over time. The company’s range of unique brands means it can offer something different to other companies, helping it make profits.

But is it a cheap share? With a market capitalisation of $275bn, I do not think so. Warren Buffett bought the shares when they were selling at a much lower price than they are now. Although I do not think Coca-Cola shares look cheap right now, I would still use the Buffett approach to look for cheap shares I could buy.

Warren Buffett is patient

What if I cannot find any shares that take my fancy? For example, maybe there is a business like Coca-Cola that I think has attractive potential, but its shares do not seem cheap.

In that case, I would wait. Buffett sometimes waits years before buying shares in a company. That is because value depends partly on how much one pays for shares. As a believer in long-term investing, Buffett hopes that the value of a business will become clear over time. But if he pays too much for its shares, the investment returns could still be disappointing.

Being patient is not always easy. But I think it is an important characteristic for investing. So while I would start hunting for attractive businesses immediately, that does not mean that I would necessarily buy shares fast. At the right price, though, I would be ready to put my £500 into a couple of companies and hold the shares for the long term.

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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