Super-investor Warren Buffett did not become a billionaire by accident. Rather, he developed and honed an approach to buying shares in great companies at attractive prices and has put it into practice over decades.
Sure, he has boatloads of cash at his disposal. But it was not always that way. Buffett’s resources today reflect his success since making his first stock market move as a schoolboy, using money from his paper round.
By learning from his techniques, I am trying to build stock market wealth myself.
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Understanding the real meaning of value
In the early days, Buffett bought into what are commonly known as value shares. Maybe a penny share had assets worth more than its market capitalisation, for example.
But although he made some money with that approach, the ‘Sage of Omaha’ changed strategy. Instead of buying into companies just because he thought their current worth was more than their share price suggested, he started focusing on businesses he felt had the means to generate money year after year, for decades.
For example, maybe they had a unique product formulation like Coca-Cola or a large customer base like American Express.
Such companies often do not come cheap. But the second part of Buffett’s strategy is buying quality companies when their share price is attractive.
He took advantage of a plummet in the American Express share price in the 1960s (following fraud perpetrated on the company by a commodities trading firm) to start building his stake.
Looking for cheap UK shares to buy
I think those Buffett principles can be useful on this side of the pond too. As an example, consider one share I bought this year and which Buffett used to hold some decades ago in its former incarnation — Diageo (LSE: DGE).
The brewing and distilling giant might not look like a cheap share at first glance. Its current share price is around 17 times earnings.
But I see it as a potential long-term bargain, which is why I bought it.
The market for drinks like gin and whisky is large and I expect it to remain that way over time. That said, one risk to that market – and Diageo’s sales – is declining levels of alcohol consumption among younger generations, compared to their forebears.
I like Diageo specifically because of its large portfolio of unique, premium brands such as Smirnoff and Johnnie Walker. That gives it pricing power which, in turn, enables it to generate lots of cash. That helps explain why the share – currently yielding 3.4% — has raised its dividend annually for decades.
So I think Diageo is cheap, even at over £23 a share, because I reckon the current price pales in comparison to what I think the business ought to be able to generate over the next 20 or 30 years with its proven business model and powerful collection of unique assets.
