Warren Buffett is one of the most famous investors in the world. Via his company Berkshire Hathaway, he has a portfolio worth over $350bn. Given the public nature of the filings, I can get a feel for what he likes and where he feels the right sectors are to invest in right now. I haven’t got his billions, but if I had a spare £1,000, here’s how I’d split it up to mimic his approach.
Being cautious, buying defensive
Buffett has never been afraid to take a cautious approach if he feels the economic outlook isn’t great or if valuations don’t look attractive. He finished last year with just under $130bn sitting in cash.
Given where the UK economy is right now, I think it makes sense to be cautious too and pick up some defensive stocks to help protect my overall portfolio. Two I like in this regard are Diageo and Keller Group. In fact, Buffett actually holds stock in Diageo, according to the latest 13F filing.
Diageo is the owner of many alcohol brands we know, ranging from Guinness to Johnnie Walker. I feel the nature of the products sold means that even if the UK economy underperforms over the next year, earnings should remain steady.
Keller Group, meanwhile, is a large infrastructure contractor, working globally. Given the long-term projects it works on and the fact that many are critical infrastructure, I feel it’ll be insulated from a short-term economic shock.
The risk for both ideas is that if we get a surprise surge in investor confidence, the performance of these names could lag that of growth stocks.
Picking up classic value stocks
Another key element of how Buffett invests is driven by his desire to find value. As such, he often buys stocks that he believes are trading below their long-term fair value price. For example, he recently bought Capital One Financial shares after the regional US banking crisis.
I can imitate that with my current selections. Both Barratt Developments and GSK shares are down in double-digit percentages over the past year. Yet I believe both are value stocks that over time will recover.
Barratt Developments should recover as part of the normal economic cycle. When times improve and interest rates are cut to boost demand, the property market should outperform.
As for GSK, there will always be demand for new medicine and related products. We have an ageing population and that isn’t going to change. With a price-to-earnings ratio now below 10 (9.52), I feel the company has fallen into oversold territory in recent months.
The risk with buying these value stocks now is that it’s impossible to perfectly time the share price low. It could be that I buy now and the stocks continue to fall in the short term. I have to be comfortable with holding a potentially unrealised loss for a period of time.
