Image source: The Motley Fool
As a multi-millionaire, it may be hard to imagine that Warren Buffett thinks too much about how to invest a few hundred pounds.
In fact, Buffett started investing on a very small scale. He has repeatedly said that he believes that he can get strong returns if he only has a little money to invest. That’s because he would be able to buy shares in firms that, as a billionaire, he no longer considered investment opportunities.
So if I had a spare £800 to invest today, here are three lessons I would learn from Buffett about applying them to the markets. I think it all makes sense when you invest £800 as £800m!
Stick to what you know
It’s easy to think that investing in a little-known company in an emerging sector can be a path to stock market success.
Sometimes it works like that. But, like Buffett, I like to stick to my circle of competence. Investing in a business you don’t understand is not investing in my opinion. Guessing.
Do less, not more
One of the interesting things about how Buffett works in the stock market is not how active he is, but how not working.
Buffett spends a lot of time researching companies and staying up-to-date on what’s going on. But he rarely invests. When he does, he usually holds onto his stake for decades. Indeed, he said his preferred time to hold “forever“.
Rather than buying stocks with the hope of selling them later, I take Buffett’s approach and buy holdings.
Always look for a competitive advantage
When choosing stocks to buy, Buffett doesn’t just focus on the size of the potential market for a particular product or service. He also looks at what competitive advantage any company has given him.
For example, consider his assignment to Coca-Cola (NYSE: KO). The demand for soft drinks is high and is likely to remain so for the foreseeable future. But the barriers to entry are low. It is easy for a local entrepreneur to start bottling and selling water, for example.
But what Coca-Cola has done is develop certain features that make it stand out. One of the proprietary drink formulas. Another brand. In addition, it has an outstanding global distribution network.
Competitive advantages are important because they help a business to differentiate itself from competitors. That would give it pricing power, meaning it has more flexibility to set prices at an attractive profit. That may not protect it from market volatility. Another risk for Coca-Cola is the increasing health awareness of many consumers, which threatens the demand for some of its core products.
Coca-Cola has a lot going for it as a business. Pricing power is important and to achieve and maintain it, a company usually needs some form of competitive advantage.
Source link
