Warren Buffett is widely regarded as the greatest investor of all time. Not only has he amassed a personal net worth of over $80bn but, over the years, he’s delivered life-changing returns for his investors as well. With that in mind, here’s a look at how UK investors can invest like Buffett.
The first thing to understand about Buffett is that when he picks stocks, he looks for high-quality businesses. While many people see him as a ‘value’ investor, a closer look at his strategy reveals that his main focus is actually ‘quality.’
For example, he tends to invest in companies that have:
A high return on equity (ROE), meaning they’re very profitable
Strong balance sheets, meaning they’re less vulnerable during downturns
Strong cash flows and liquidity, meaning they can always pay their liabilities
While valuation is important to Buffett, it’s not the be-all-end-all. “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price,” he says.
So, how can UK investors get exposure to high-quality, Buffett-style companies?
One of the easiest ways to get exposure to high-quality stocks is to invest in a fund that has a quality-focused investment strategy. Fundsmith Equity fund and the Lindsell Train Global Equity fund are two funds that come to mind here (the portfolio managers of these two funds, Terry Smith and Nick Train, have both been described as ‘Britain’s Warren Buffett’).
Some of the top holdings in these funds include Microsoft, Unilever, Diageo, and PayPal – which all screen up well from a quality-investing perspective. Both of these funds have performed really well in recent years, although past performance is no guarantee of future performance.
If you don’t like paying fund manager fees, you could invest in a quality-focused exchange-traded fund (ETF) instead. One of my favourite funds here is the iShares Edge MSCI USA Quality Factor index, a low-cost, US-focused passive fund that invests in companies that have a high ROE, low earnings variability, and low debt.
Top holdings in this fund currently include Apple, Johnson & Johnson, Mastercard, Facebook and Visa (Buffett also owns these stocks, except Facebook).
Finally, if you fancy yourself as a bit of a stock picker, you could invest in a selection of high-quality, Buffett-style, stocks yourself. Here in the UK, there’s plenty of stocks with quality attributes. For example, in the FTSE 100, companies like Unilever, Diageo, Reckitt Benckiser, Sage, and Rightmove, all tick many boxes from a quality-investing perspective.
And I’ll point out that you don’t need to limit yourself to buying UK stocks – today, it’s very easy to buy internationally-listed high-quality stocks such as Apple, Microsoft, Coca-Cola, and Mastercard for your portfolio.
Put together your own portfolio of high-quality stocks and hold them for the long term as Buffett does, and you could see some amazing results.
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Edward Sheldon owns shares in Unilever, Diageo, Rightmove, Sage, Reckitt Benckiser, and Apple and has positions in the Fundsmith Equity fund and the Lindsell Train Global Equity fund. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. The Motley Fool UK owns shares of and has recommended Apple, Facebook, Mastercard, Microsoft, Unilever, and Visa. The Motley Fool UK has the following options: short January 2020 $155 calls on Apple and long January 2020 $150 calls on Apple. The Motley Fool UK has recommended Diageo, Johnson & Johnson, Rightmove, and Sage Group and recommends the following options: long January 2020 $150 calls on Apple, short January 2020 $155 calls on Apple, and long January 2021 $85 calls on Microsoft. 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.