If I had a spare £1,000 to invest in UK stocks for 2023, and I wanted to invest in the style of Warren Buffett I’d buy the following five shares:
- Plus500
- Imperial Brands
- BHP
- B&M European Value
- Computacenter
These are the British stocks that I feel allow me to echo his investing philosophy most closely and that offer diversification across industries.
What are Warren Buffett-style stocks?
I won’t pretend to know exactly how Warren Buffett and his business partner Charlie Munger select stocks for their portfolio. However, there are numerous books written on their investing style. There are plenty of investing-related quotes attributed to the pair. And of course, there are the letters to Berkshire Hathaway shareholders, penned by the man himself to digest.
| Price-to-free cash flow per share (TTM) | Return on Equity (TTM) | Operating Margin (TTM) | Revenue growth (5yr CAGR) | |
| Plus500 | 3.9 | 55.8% | 56.8% | 17.0% |
| Imperial Brands | 6.5 | 25.7% | 8.2% | 1.5% |
| BHP | 6.6 | 42.1% | 52.4% | 12.7% |
| B&M European Value | 7.7 | 49.4% | 12.2% | 14.0% |
| Computacenter | 12.6 | 23.7% | 3.87% | 15.7% |
While some might describe Warren Buffett as a value investor, I’d say he looks for quality. He likes bigger businesses that generate plenty of cash, have high returns on equity, solid margins for their industry, and have been doing all that for years. They also have to have a business model that’s simple to understand. All this combines to make a judgment that the earnings of the company will likely be higher in five, 10, and 20 years. If such a business is available for a rational price (there’s the value investing part), then Warren Buffett would likely be interested in buying it and holding it for the long term — his favourite holding period is widely quoted as being “forever“.
Portfolio diversification
In my hunt for Warren Buffett-style stocks, I generated a list of more than five. Many of the highest-rated stocks based on metrics such as free cash flow per share and return on equity didn’t make my final list. That’s because I wanted five shares that came from different industries.
Diversification is crucial. Five stocks from the same industry can suffer the same fate. Take for example the recent news of Direct Line cutting its dividend because of bad winter weather driving up the cost of claims. Its share price fell, but so did the prices of other insurers’ stocks because they’re in the same business and investors thought they’d struggle too. A portfolio of insurers would have been hammered.
Investing £200 across five industries, consumer cyclical (B&M), basic materials (BHP), financials (Plus 500), consumer defensive (Imperial Brands), and technology (Computacenter), would give a degree of diversification. But would it be enough? Were I building a new portfolio with just these stocks, then I would say no, it wouldn’t. I’d want to add a position in an ETF that tracks a broad market index like the FTSE All-Share. That would mean either sacrificing one of the five Buffett-style stocks or committing additional funds.
Were I adding these five to an existing Stocks and Shares ISA portfolio of say, 15 stocks, then I might be happy with the diversification, assuming of course my existing portfolio isn’t concentrated in too few industries.
