As one of the most successful investors of the past century, Warren Buffett inspires curiosity among many share buyers. They want to learn from his investment techniques and see whether they can emulate his success.
But Buffett is used to managing billions of pounds. Can his techniques work even if one is investing a more modest amount, such as £500? I think they can. Here is how.
Warren Buffett buys shares in public companies
One of Warren Buffett’s favourite investments is putting money to work in the stock market. By buying shares in large listed companies, he hopes to benefit from their asset base and professional management without having to get involved directly.
That is often as easy for me to do as it is for Buffett. Admittedly the percentage impact a commission has on a £500 portfolio may be higher than on a much larger portfolio. But I could buy shares in the sorts of companies Buffett does, such as Coca-Cola or American Express. Indeed, there is a wide array of companies in which I could invest with my £500 whether or not Buffett owns them. To reduce my risk if a company performs poorly, I would diversify my portfolio across multiple companies.
Focussing on value creation
When deciding what shares to buy, Buffett does not pay much attention to stock market fads. Instead he assesses whether he thinks the return he can get from holding a share will reward him well enough, allowing for the risk of holding it.
To do that, he makes some judgements. He considers a company’s business and its long-term durability. He also looks at its competitive advantage. Buffett likes a company with a strong competitive advantage, which he calls a “moat”. That is what enables a business to raise its prices over time and hopefully make profits year after year.
So, when Buffett looks at shares he might buy, he zooms in on how much money he reckons the company may be able to earn in the future. He then compares that to the current price at which the company’s shares trade. That focus on the potential for value creation is something I can also do as a private investor with £500 to put to work in the market.
Taking time and researching
Warren Buffett is a very patient investor. He is willing to sit on funds for years if necessary until an investment opportunity comes along that he regards as sufficiently attractive.
He spends a lot of time reading and learning about companies, even ones he does not buy. That helps him be better prepared when an opportunity arrives which he does like.
If anything, I think these habits of patience and research might actually be even more useful to me with £500 than to Warren Buffett. After all, with the large funds at his disposal, Buffett can afford some serious mistakes. But with just £500 to invest, a few serious mistakes could wipe out my investment funds. Buffett has a much larger scope for error. That is why I take my time, read widely, and carefully research potential shares for my portfolio. Investment is a marathon not a sprint.
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Christopher Ruane has no position in any of the shares mentioned. American Express is an advertising partner of The Ascent, a Motley Fool company. The Motley Fool UK has no position in any of the shares mentioned. 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.