Investor Warren Buffett first bought into the stock market as a schoolboy, using money he had saved from a paper round. Today, decades later, he is a billionaire many times over.
That is not a coincidence. From a standing start, Buffett has built wealth applying a number of investing principles. By learning from him, I hope to be able to achieve great wealth too.
Is there magic in the Buffett method?
Perhaps the most interesting thing about how Warren Buffett has built his wealth is the obviousness of his technique.
He has bought into established companies, many of them publicly listed on the stock market. These have typically been proven businesses and have often been on the go for decades before Buffett bought even a single share. Nor are these little firms few people have heard of: Buffett’s portfolio includes businesses like Apple and Coca-Cola.
So the Warren Buffett method is not about being the first to invest, or spotting a great idea before anyone else does. Rather, he focusses on buying into a small number of high-quality businesses with significant future commercial potential, when he can do so at what he sees as an attractive price.
Rather than try to sell quickly, Buffett then usually holds his stake for the long term.
Hunting for Buffett-like buys
So, if I wanted to follow the Warren Buffett method when looking for shares to buy, what would I look for?
My circle of competence is different to Buffett’s and I would stick to areas I feel I know and understand. But like him, I would look for markets I feel are likely to benefit from large customer demand over the long run.
Within them, I would hunt for businesses that have some specific competitive advantage I think gives them pricing power. Finally I would consider the valuation. After all, even a great business can make for a poor investment depending on what one pays for it.
Here’s a share I’d like to own
As an example, consider Unilever (LSE: ULVR). It is such a ‘Buffett-style’ investment that in fact he tried to buy the whole company a few years ago, although the bid was rejected.
It operates in markets likely to benefit from high long-term customer demand, such as facial washes and laundry detergent. Thanks to a portfolio of premium brands it has pricing power, while a global distribution network means that its products are used several billion times daily around the world.
All of that adds up to a business that is profitable and regularly pays dividends. A weaker economy could see some consumers switch to cheaper supermarket brand products, hurting revenues and profits. Over the long term, though, Unilever is the sort of business I would happily invest in – at the right price.
With a price-to-earnings ratio currently above 20, though, I do not find the price tag compelling.
So for now I will keep Unilever on my watch list and continue hunting elsewhere for shares to buy using the Warren Buffett method.
This post was originally published on Motley Fool
