Warren Buffett’s investment strategy is simple but effective. As such, following it could prove to be beneficial for an investor who’s seeking to grow the size of their Stocks and Shares ISA over the long run.
Through focusing on high-quality companies when they trade at low prices, holding substantial amounts of cash and having a long-term view, an investor may be able to build a surprisingly large ISA portfolio as share prices recover from the stock market crash.
Warren Buffett’s focus on high-quality companies
Buffett doesn’t just buy cheap stocks. Rather, he focuses on purchasing high-quality businesses when they trade at low prices. As such, he may not necessarily buy the cheapest shares available at a specific time. He may, instead, buy more expensive companies that offer better scope for profit growth in the coming years.
At the present time, a number of UK shares trade at low prices following the stock market crash. However, not all of them are necessarily attractive investment opportunities for Stocks and Shares ISA investors. Through focusing on businesses with clear competitive advantages, solid balance sheets, and the right strategies to adapt to a changing economic outlook, an investor could generate impressive returns.
A long-term view of a Stocks and Shares ISA
Warren Buffett’s time horizon is exceptionally long. He doesn’t seek to buy and sell shares over a short time period. This is in contrast to the strategies of many Stocks and Shares ISA investors. Indeed, many don’t provide their holdings with sufficient time to recover from a decline.
The stock market’s track record shows it’s always recovered from its various declines in the past. Moreover, the world economy is likely to deliver an improving GDP performance over the coming years as fiscal policy stimulus has its desired impact. Therefore, holding onto high-quality companies even if their share prices have fallen may yield impressive returns over the coming years.
Holding cash alongside UK shares
Holding large amounts of cash has been a key feature of Warren Buffett’s investment strategy over the long run. This allows him to quickly take advantage of falling share prices in a stock market crash. As such, the low short-term returns from cash are likely to be a price worth paying for additional financial flexibility.
Certainly, cash returns are poor at the present time. This may mean Stocks and Shares ISA investors veer away from having any cash balance at all. However, with the world economy’s short-term outlook being very uncertain, having some spare cash available to invest, should more attractive opportunities come along, could be a sound move. It may lead to a larger ISA valuation in the long run that has a positive impact on an investor’s financial position.
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.