Billionaire Warren Buffett uses these simple rules to build his portfolio

This Fool explores the rules Warren Buffett employs when buying businesses. He also highlights one stock he thinks might fit his criteria.

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Warren Buffett at a Berkshire Hathaway AGM

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Warren Buffett’s a US billionaire investor who’s often touted as one of the best to ever do it. In his eight decades of investing, he’s turned just a few dollars into over $130bn.

Berkshire Hathaway, his investment conglomerate, returns 20% a year on average. That’s double the S&P 500.

That’s mind-boggling. But what use is it for investors? Well, seeing how the ‘Oracle of Omaha’ selects his companies could help them in their attempts to beat the market.

He doesn’t buy stocks

Scouring Buffett’s holdings, along with considering the invaluable information he’s provided across the years, a few things stand out.

Buffett doesn’t buy stocks. He buys businesses. As such, he’s said before that investors shouldn’t purchase a stock just because they think its price will rise. After all, the market is unpredictable.

Instead, buying businesses you understand’s the key. Buffett believes investors should be able to write down on a piece of paper exactly why they plan to buy the company.

Alongside this, he also invests in businesses that can stand the test of time. As he famously said: “Nobody buys a farm based on whether they think it’s going to rain next year.”

Having an edge goes a long way

What is also noticeable, and as the Oracle has highlighted before, a good proportion of the companies Berkshire owns have a moat. That’s a competitive advantage that allows them to stand out from the crowd and stay ahead of the pack.

Take Apple as an example. It makes up 41.5% of Berskhire’s portfolio. There’s a reason for that. It’s because 20% of the world’s population uses its products. That’s a massive grip on the market.

Furthermore, the business is incredibly effective at keeping users in its eco-system. It’s factors such as those that have helped its gross profit rise by 139.2% in the last decade.   

Putting it into practice

I want to explore a stock that, while Buffett doesn’t own it, I think meets his requirements. That’s FTSE 250 constituent Games Workshop (LSE: GAW).

There are a few reasons why I think he could be keen on the business. The main one is its moat. Games Workshop operates in the miniature wargame industry. It’s a market leader. Regarding competition, there isn’t much out there. That’s allowed the company to deliver impressive growth in the last decade.

It’s now set to capitalise on its intellectual property for Warhammer 40k through a lucrative deal with Amazon. As a shareholder, I’m excited about where this could take the business as it exposes it to Amazon’s 200m users.

There’s more to like about the business too. It has minimal debt and plenty of cash to hand. As a result, Games Workshop only uses “truly surplus cash” to reward investors with its 4.3% dividend yield.

The shares do look a bit pricey. They’re trading on 23 times earnings. That’s above the FTSE 250 average of 14. But I’d be prepared to take that risk if I didn’t already hold the stock. Buffett doesn’t mind paying the price for quality. So I won’t either.

With that, I think Games Workshop’s a stock Buffett would like. Unfortunately, I can’t ask him. Nevertheless, I still think investors should strongly consider adding it to their portfolios today.

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 assessed. Consider taking independent financial advice.

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Charlie Keough has positions in Apple and Games Workshop Group Plc. The Motley Fool UK has recommended Amazon, Apple, and Games Workshop Group Plc. 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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