Over the past seven decades, Warren Buffett has turned a six-figure sum into a multi-billion pound fortune. This track record makes him one of the best investors of all time. He has used a unique strategy to create wealth since the 1960s, which I plan to follow when looking for cheap UK shares to buy for my portfolio.
The Warren Buffett strategy
In some ways, the strategy used by the billionaire is relatively simple. He is looking for high-quality companies with strong managers which can grow yearly and produce significant returns for investors.
This strategy is simple to describe, but it is relatively challenging to follow. Some companies might look like they can generate returns for shareholders year after year, but there is no guarantee.
Any number of headwinds could impact a company’s growth potential. Challenges such as rising interest rates, inflationary pressures, and competition are just a few of the risks UK shares face right now.
To help refine his strategy, Buffett only considers adding companies to his portfolio in sectors that he knows and understands well. This is the second part of the strategy that helps distill potential ideas.
The biggest mistake investors can make is buying something they do not understand. Buffett gets around this issue by only focusing on businesses that he does know well.
Looking for cheap UK shares
So there are two parts of Buffett’s strategy I am using to find cheap UK shares. First of all, I will be looking for high-quality companies with growth potential. Secondly, I will only buy businesses in sectors I know and understand well.
Following this strategy, there are a handful of stocks that I would add to my portfolio right now.
Two sectors I know well are consumers goods and insurance. In the consumer goods sector, I would buy Britvic and AG Barr for my portfolio. I believe both are well-managed, own portfolios of valuable brands, and have room for growth over the next couple of years (and possibly decades).
Meanwhile, I am attracted to the insurance giant Admiral and Lloyd’s of London insurer Beazley in the insurance sector. Admiral is one of the country’s largest car insurance providers and is expanding worldwide. Meanwhile, Beazley is using its experience to build a globally diversified insurance group.
One challenge these companies and the consumer goods stocks outlined above may face going forward is inflationary pressures. These could increase the costs of doing business and impact profit margins.
I believe that by focusing on these companies, I can replicate at least some of Buffett’s success by acquiring cheap UK shares for my portfolio. Over the next couple of decades I think these businesses have the potential to outperform their peers and reward shareholders at the same time.
Rupert Hargreaves owns Admiral Group. The Motley Fool UK has recommended AG Barr, Admiral Group, and Britvic. 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.
