Warren Buffett’s career shows investors don’t need an exceptionally complicated strategy to outperform the stock market over a long time period. His focus on the quality of a company, as well as the price paid for it, has helped him to become one of the wealthiest people in the world.
That same strategy could prove to be useful for any investor. As such, when investing £1k (or any other amount) in shares through a Stocks and Shares ISA, it could be worth following these Buffett tips before deciding what companies to buy. In the long run, it could lead to an increased chance of retiring early.
Perhaps the central theme of Buffett’s investment strategy is purchasing high-quality businesses. Clearly, defining whether a company is high quality or not is subjective. Buffett focuses on criteria such as a company’s economic moat, as well as the returns it has offered to equity holders.
In terms of an economic moat, this could take the shape of a high degree of customer loyalty for a large brand. Or it could mean a company enjoys a lower cost base than its rivals which provides competitive advantage. Equally, it may mean a business has a unique product.
Essentially, an economic moat equates to a stronger position versus sector peers which can lead to better financial performance in the long run. Such businesses can be worthy of significantly higher valuations than their sector rivals.
When it comes to buying companies, Buffett has stated that he would “rather buy a great company at a fair price than a fair company at a great price.” While this may be the case, he has historically sought to pay a price for all the companies he buys which represents a discount to their intrinsic value. In other words, he aims to buy a stock for less than he thinks it’s worth. In doing so, he obtains a margin of safety which can provide him with a favourable risk/reward ratio.
With the FTSE 100 and FTSE 250 currently offering a wide range of companies that seem to offer low valuations – especially compared to their historic averages – there may be a number of opportunities to buy high-quality businesses at low prices.
With the stock market having a track record of volatility, Buffett aims to capitalise on its cyclicality. He often purchases stocks while other investors have a pessimistic attitude towards the wider market. He then holds those companies for the long term, with his favoured holding period apparently being ‘forever’.
Therefore, now could be the right time to buy high-quality companies while they trade on low valuations. Holding them for a number of years could boost your ISA returns and lead to an increasing chance of an early retirement.
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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.