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Stocks and Shares ISA: I think following Warren Buffett could be a good way to get rich

With ‘ISA season’ upon us, many investors may be searching for ideas on where to invest their hard-earned cash.

Clearly, the investment landscape is challenging at the present time. The FTSE 100 and FTSE 250 have made gains so far this year, with the UK’s economic performance being relatively sound. However, risks remain in the near term from Brexit, with political risk arguably at its highest level since the financial crisis.

In such times, it may be prudent to consider how successful investors such as Warren Buffett have built their fortunes. With that in mind, here are a number of ideas as to how the ‘Sage of Omaha’ has been able to deliver high returns over a sustained period of time.

Economic moats

While the idea of an economic moat is nothing new, it could become increasingly relevant over the medium term. Although the UK and global economies have experienced strong growth in recent years, there are a number of risks ahead. As well as Brexit, they include rising US interest rates and a slowing China. There is also the potential for further import tariffs, which could hurt global trade to some degree.

As such, investing in companies that have a competitive advantage could become increasingly important. Only the most dominant operators in a variety of industries may be able to offer improving financial performance over the medium term, should the world economy experience a downturn.

Sell underperformers

While Warren Buffett is known to hold on to stocks for an exceptionally long period, he is also quick to sell companies that are underperforming. Clearly, if the business still has a bright future and continues to be undervalued, this is unlikely to be a reason to sell. But if there is a material change in its outlook, Buffett has been known to swiftly sell underperforming holdings – even if it means absorbing a significant loss.

With there being a number of FTSE 100 shares that continue to experience challenging trading conditions and which may fail to deliver improving performance in future, now could be a good time to pivot to other stocks. Doing so may be painful in the short run, but the opportunity cost of failing to do so could be high.

Diversity

While diversifying is undoubtedly a sound move, since it reduces company-specific risk, Buffett runs a fairly concentrated portfolio. Although this may not be advisable for many investors, it serves to show that ultimately it can pay to take risks in the long run.

As such, for investors who have a long period ahead of them, it may be worth buying a variety of shares while ensuring that a portfolio has the potential to outperform the wider index. Otherwise, it may reach a point where it is cheaper, and easier, to simply buy an index tracker.

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