Invest like Warren Buffett? Here are 3 simple ways to do it
Most investors would be happy with anything like the stock market success of billionaire Warren Buffett. He has achieved legendary status because of what seems like his Midas touch in the markets.
In fact, as he himself says, a lot of Buffettâs success has been built on consistently applying some pretty simple but effective principles.
Small, private investors with just a modest amount of spare cash can apply some of those Buffett principles themselves. Here are three.
Know what youâre doing
It sounds blindingly obvious, but if you put money into a business you do not understand, you are not investing. You are merely speculating.
Yet that is exactly what a lot of people do, putting their hard-earned cash into shares without understanding how the business in question even makes its money (if it does).
Buffett sticks to his circle of competence. He has spent huge quantities of time learning about industries and specific businesses so he is more likely to know what he is getting into when he buys a given share.
Reinvest the earnings
Buffettâs company Berkshire Hathaway is rolling in cash â to the tune of hundreds of billions of dollars. Yet, rather than pay a dividend, he is happy to let it up pile up awaiting some future use.
That is an example of what is known as compounding. Rather than see dividends as passive income to fund lifeâs little luxuries, Buffett aims to use them to speed up his wealth building.
Even on a small scale, a private investor can do the same with any dividends they earn.
Never ignore valuation
There are multiple reasons Buffett may decide not to buy a particular share. For example, he may not comfortably understand its business or may feel uneasy about its accounting practices.
But another reason is because the share price is too high. Many people think a great business makes a great investment. Buffett is a seasoned enough market participant to know that the two things are not necessarily the same. Even a great business can make a poor investment if they are overpriced.
I apply this approach. For example, one share I have been eyeing for years is food producer Cranswick (LSE: CWK).
It is not a household name but makes a lot of food products sold in supermarkets and grocery stores. Cranswick has honed a highly successful business in this rather unexciting-sounding field. It has grown its dividend per share annually for more than three decades.
Cranswick has developed an extensive network of food production sites and developed deep relationships with customers. It has honed a consistently profitable business model.
One risk I see is reputational damage. Cranswick has attracted negative headlines this year relating to the conditions at one of its pig farms. That could hurt customersâ enthusiasm for its products, and so damage its revenues.
At the right price, I would be happy to buy Cranswick shares. However, at 22 times earnings, the share price is higher than I am willing to pay. So for now, I will do what Buffett sometimes does for years with a share⦠watch and wait.
The post Invest like Warren Buffett? Here are 3 simple ways to do it appeared first on The Motley Fool UK.
5 Shares for the Future of Energy
Investors who don’t own energy shares need to see this now.
Because Mark Rogers — The Motley Fool UK’s Director of Investing — sees 2 key reasons why energy is set to soar.
While sanctions slam Russian supplies, nations are also racing to achieve net zero emissions,
he says. Mark believes 5 companies in particular are poised for spectacular profits.
Open this new report — 5 Shares for the Future of Energy
— and discover:
- Britain’s Energy Fort Knox, now controlling 30% of UK energy storage
- How to potentially get paid by the weather
- Electric Vehicles’ secret
backdoor
opportunity - One dead simple stock for the new nuclear boom
Click the button below to find out how you can get your hands on the full report now, and as a thank you for your interest, we’ll send you one of the five picks — absolutely free!
More reading
- Hereâs how a £20k ISA could earn £1,400 in passive income next year â and every year
- A top UK share to consider buying when the markets melt down?
- 2 small-cap stocks with low P/E and PEG ratios!
- Rolls-Royce shares could still go higher!
- Hereâs why Nvidia stock could still be cheap
C Ruane has no position in any of the shares mentioned. 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.
