How I’d invest £1,000 with 3 lessons from Warren Buffett

Many of the shares in my portfolio dropped lower today. But the interesting thing is some of my stocks went up. For example, stocks with businesses involved in the oil and gold mining industries moved higher.

And that underlines to me how useful it can be to own the shares of several businesses representing diversification across various sectors. After all, the fortunes of different industries don’t all move in lock-step.

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Robust underlying businesses

I reappraised my portfolio today to make sure I’m still happy holding all my stocks. And despite the price weakness, I can’t see any factor that has diminished the attractive opportunities possessed by each underlying business. So, my conclusion was to sit tight, hold on to all my shares and ride out the current wave of market volatility.

And that’s often the case when pursuing a long-term investment strategy. But it works best after buying stocks with care in the first place. And to me, that means focusing on quality, valuation and prospects.

The great investor Warren Buffett is known for shopping for stocks when many people are worried about something and the stock market is weak. So, I reckon the current environment is a good time to search for shares to hold for the long term. And I’d aim to invest £1,000 with three lessons from Warren Buffett.

However, there are no certainties or guarantees. And it’s still possible for me to lose money with stocks and shares even if I apply these three Buffett lessons. Nevertheless, his advice is useful to me.

Searching for the wonderful

And the first lesson is to focus on what Buffett describes as wonderful businesses. To me, that means paying close attention to the quality of an enterprise in terms of its profit margins and returns against capital invested. But it also means appraising a company’s competitive advantage. And aiming to understand how the business can preserve its trading position in its markets.

We often hear Buffett talk about economic moats, meaning factors that help to keep the competition from stealing the company’s market share. Perhaps it’s the ownership of strong brands or patents. Or it could be geographical monopolies or network advantages among other things.

But those factors aren’t all that’s needed to make a business wonderful. There also needs to be a strong runway for future growth of operations and profits.

Valuation and tenacity

The second lesson is to buy stocks below what a company is worth. And that means focusing on valuation. Otherwise, it’s possible to pay too much for a wonderful and growing business. And that could lead to unhappy investment outcomes. For example, we’ve seen some huge share price reversals recently. But many of those falling stocks are backed by decent businesses. It’s just that their valuations had risen too high.

The third lesson I’d apply from Buffett is to approach stocks as if buying the entire business. And to me, that means avoiding the temptation to sell simply because of price fluctuations. And that’s the lesson I used when reappraising my portfolio today.

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Kevin Godbold 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.

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