Warren Buffett‘s widely regarded as the greatest stock market investor of all time. Over the years, he’s built up an absolute fortune by investing in shares (his net worth’s about $135bn today).
Interested in investing a few grand the Buffett way? Here’s what you need to know.
A focus on quality
People often see Buffett as a ‘value’ investor. But when you analyse his holdings, it’s clear that value’s not actually his main focus these days.
His largest holding today, for example, is iPhone maker Apple. And that’s a relatively expensive stock (its price-to-earnings (P/E) ratio’s currently about 35, which is well above the market average).
Instead, his focus is more on ‘quality’. Ultimately, he likes to invest in world-class businesses that have:
- Wide ‘economic moats’ that protect their profits (eg strong brands)
- Attractive long-term growth prospects
- High levels of profitability
- Solid balance sheets
Apple has all of these attributes. Some other examples of companies he’s invested in that also have them include Coca-Cola, Visa, and American Express.
It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.
Warren Buffett
The secret to stock market success
Why does he like to invest in these types of businesses? Well, it’s simple. Buffett understands that if a company has a high level of profitability and strong growth prospects, along with a wide moat and a healthy balance sheet, there’s a good chance it’ll be able ‘compound’ its profits over time.
And this really is the key to generating strong long-term returns from the stock market. In the same way that compound interest can make savers wealthy over time, compounded profits can make companies much bigger (and their shareholders much richer).
Apple’s a great example. Over the last 10 years, it’s risen over 800% (making Buffett and his investors a ton of money).
Finding Buffett-type stocks
The good news is that on the London Stock Exchange there are a lot of high-quality stocks that have the attributes Buffett looks for.
One example is property search powerhouse Rightmove (LSE: RMV). It has a really strong brand that’s well known across the UK. This gives it both a wide moat and pricing power (which should lead to growth in the future).
It’s also very profitable as it’s a simple business that doesn’t require a lot of capital to run. Looking at its return on capital, it’s been the most profitable company in the FTSE 100 index over the last five years.
Additionally, it has a strong balance sheet with minimal debt. So it’s unlikely to be vulnerable in an economic downturn or period of high interest rates.
Now there are no guarantees this stock will do well in the long run, of course. There’s always a chance a new competitor could come along and disrupt its business model.
With the stock currently trading well off its highs (at a very reasonable valuation) however, I think it has a lot of appeal today.
If you’re looking for more stock ideas like this, you’ve come to the right place. Here at The Motley Fool, we’re huge Buffett fans.
This post was originally published on Motley Fool
