Legendary investor and CEO of Berkshire Hathaway Warren Buffett is worth $89bn and is the third richest person in the world after Jeff Bezos, founder of Amazon, and Bill Gates, founder of Microsoft.
He has shared many nuggets of investing wisdom over the years, but it all boils down to considered his strategy being to buy and hold stocks for the long term. This has served him well in amassing his considerable fortune.
Some key factors Warren Buffett looks for in a company before investing include:
- Management with integrity
- Reasonably low price-to-earnings ratio (P/E)
- Room for growth
- A plan to make a profit
- Dividend payments
- A sensible level of debt
Spreading the risk
If I had £10k to invest today and was to follow Warren Buffett’s advice, I’d look for two to four companies to invest in. Around £2.5k to £5k per investment seems like a sensible sum to get started with (anything less and the transaction fees eat into any profits).
I’d vary the sectors to dilute risk, and I’d look to invest in areas relevant to the political climate we are living in.
Some areas of investment I anticipate increased interest in for 2020 are:
- Plant-based diets
- Fighting data breaches
- Terrorism protection
- Reducing our carbon footprint
Taking these into consideration, I’d probably look for a company in health and pharmaceuticals, one in defence and one involved in manufacturing healthy ingredients. Examples that spring to mind include FTSE 100 companies Hikma Pharmaceuticals and BAE Systems and FTSE 250 business Tate & Lyle. However, these stocks all did very well in 2019 and may now have P/Es higher than preferable for a Warren Buffett-type investment.
When researching companies for yourself, it’s important to look at past performance, current sentiment surrounding the stock and the future outlook management has planned for the company. A good place to start is reading the latest annual report.
Debt and dividends
Choosing well-established companies that you can count on to go the distance means your money will be better protected in times of recession or political uncertainty. By investing in a company that you understand and that makes sense to you as a viable business is a big part of the selection process. Each of the companies I mentioned above make sense to me and I think they have a strong purpose in the world today.
When you find a company about which you feel the same, I must say that one key issue to be aware of is any firm’s debt levels. A manageable level of debt is acceptable to allow a company to grow. But if a company has too much debt, then it doesn’t have the leverage to expand the business, make acquisitions or achieve shareholder retention through increases in dividends.
And dividends really count. The value of the dividend is that it can help compound your gains and increase your wealth generation more quickly than relying on share price increases alone. The promise of a dividend payment on your investment gives you as close to a guarantee as you can get for stock market gains. The power of compounding can’t be overstated and over time it allows you to gain interest on your interest. I think both new and seasoned investors alike would do well to heed Warren Buffett’s advice before diving headfirst into buying stocks.
