Warren Buffett is best known for investing in US stocks like Coca-Cola and Apple. But a lot of the legendary investor’s advice focusses on how to find undervalued shares. That applies to UK shares too, not just American ones.
Here are three ways I would follow Buffett’s advice when hunting for the best UK shares to add to my portfolio now.
1. Look for a moat
Buffett focusses on companies that have a sustainable competitive advantage. He talks about this as a “moat”. Just like a moat could help repel invaders from a medieval castle, a strong competitive advantage can fend off competitors in the modern business marketplace.
In fact Coca-Cola is a good example. Its proprietary formula is impossible for a competitor to replicate exactly. That gives it pricing power, which has already lasted for many decades and could continue for a long time yet.
Among UK shares, one with a Buffett-style moat I own in my portfolio is consumer goods giant Unilever. The company owns brands like Dove and Marmite, which it would be hard for a competitor to match with their own product in quite the same way. Indeed, Buffett himself sees the appeal of Unilever and some years ago made a bid to buy the whole company. The Unilever share price is cheaper now than it was then, although the risk of cost inflation eating into profits has become more pronounced.
2. Warren Buffett takes his time
Buffett is always looking at companies. But that does not mean that he is always buying. In fact, he sometimes goes years at a time without a big share purchase. Many of his holdings have sat undisturbed in his portfolio for decades.
Like Buffett, I see no reason to rush. It can lead to far worse investment returns, even when owning good companies. Instead I am willing to wait, a long time if necessary. An example is the company Victrex. I like its proprietary technology, which I think gives it a moat. But the current share price values it at 24 times earnings. I do not think that is particularly good value for my portfolio. I am waiting and watching, though. Like other companies on my watchlist, if the Victrex share price becomes attractive in my view, I will consider adding it to my portfolio.
3. Focus on what I know
Buffett emphasises the importance of staying inside one’s circle of competence when investing.
I apply that approach when looking for UK shares to buy for my portfolio. There may be some excellent biotech shares, for example, but I do not understand their specific business area well enough to assess them. So instead, I restrict my search to what I do know.
An example is Diageo. Its business model of selling premium branded drinks like Johnnie Walker is something I understand and feel I can evaluate. I also feel comfortable assessing possible threats to its business, such as an increase in young people shunning alcoholic drinks.
Like Unilever, its brand portfolio gives it a moat and pricing power. Indeed, I see Diageo as a Buffett-style pick and would consider adding it to my portfolio for the long term.
Christopher Ruane owns shares in Unilever. The Motley Fool UK has recommended Apple, Diageo, Unilever, and Victrex. 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.
This post was originally published on Motley Fool
