When it comes to investing, not many people have as strong a track record as billionaire Warren Buffett. That is why I apply some of the principles used by the Sage of Omaha when finding shares to buy for my portfolio. My main focus is on UK shares not American ones – but I think the same principles apply on both sides of the pond when it comes to hunting for bargain investments! Here is how I am going about it at the moment.
Getting clear about value
Successful investing relies on being able to identify value, whether it is obvious or hiding in plain sight.
If I pay more for a share than it is worth, over the long term I am unlikely to do well in the stock market. But if I can find shares that sell for less than their intrinsic value — ideally much less — then hopefully over time that value will shine through and my investment will reward me.
Different approaches
Spotting value can be difficult. Different investors use a variety of methods to determine it. Indeed, that range of opinions about what any given share is worth helps explain why stocks move around in value even when the business itself is stable.
Valuation is not easy. Think about a company like ITM Power, which is loss-making, or miner Greatland Gold which is not only loss-making but has no revenues to boot. On what basis ought UK shares like these to be valued?
Looking for great companies
The answer is a matter of individual investing choice. That choice can have big financial consequences. After all, as an investor I am looking to buy slices of companies for less than I think they are worth.
I start by looking for companies I think have outstanding commercial prospects. Although I prefer a firm to have a business model that has proven profitable for it already, this assessment is a forward-looking one. So I look to see whether a company has assets like unique technology or a strong brand, that can help it profit over the long term from customer demand.
How to value shares
I then look at a company’s finances. For example, if it has big profits but also large debts, then it may cut its dividend.
We have seen that scenario unfold before at Vodafone. The telecom giant’s current share price suggests that some investors see a risk it could happen again.
Taken overall, understanding a company’s future prospects and its finances can help me assign a rough value to it. If I cannot do that, for example, because its accounting methods are too vague or business outlook is highly unpredictable, then typically I simply would not invest.
I’m buying UK shares
But sometimes I do see a share that I think is “on sale” compared to its value.
There may be a reason for that I do not grasp fully at the time. To help reduce the risk of such poor investments for my overall portfolio, I always keep it diversified.
I have been using this approach lately to buy UK shares I think are on sale. Indeed, I recently bought into Vodafone with just this method. I continue to look for bargains right now!
