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Image source: The Motley Fool
When it comes to investing, not many people have as strong a track record as billionaire Warren Buffett. That’s why I apply some of the principles used by the Sage of Omaha when finding stocks to buy for my portfolio. The main focus on UK shares is not American – but I think the same principles apply on both sides of the pond when it comes to hunting for bargain investments! That’s how I’m going about it now.
Be clear about value
Successful investing depends on being able to recognize value, whether it’s obvious or hidden.
If I pay more for the share than it is worth, over the long term I am not likely to do well in the stock market. But if I can find a stock that is selling for less than its intrinsic value – that would be great many less – then hopefully over time the value will shine through and the investment will reward me.
A different approach
Spotting value can be difficult. Different investors use different methods to determine. Indeed, the variety of opinions on stock prices given helps explain why stocks rise in value even when the business is stable.
Evaluation is not easy. Think about a company like ITM powerthe one who makes it, or the miner Greatland Gold which is not only loss-making but not profitable to boot. Should a UK stock base like this be valued?
Looking for a great company
The answer is individual investment choices. These choices can have huge financial consequences. After all, as an investor I’m looking to buy slices of the company for less than I think it’s worth.
I started by looking for a company with which I had outstanding commercial prospects. Although I prefer companies to have proven business models that are profitable, this assessment is a forward-looking assessment. So I see that companies have assets like unique technology or a strong brand, which can help them profit in the long term from customer demand.
How to calculate shares
I then looked at the company’s finances. For example, if it has a large profit but also a large debt, then it may reduce the dividend.
We’ve seen that scenario play out before Vodafone. The telecommunications giant’s share price today suggests that some investors see the risk that it could happen again.
Overall, understanding the company’s future prospects and finances can help me determine a rough value. If I can’t do that, for example, because the accounting method is unclear or the business prospects are unpredictable, then I usually won’t invest.
I bought UK shares
But sometimes I see parts that I think”on sale” compared to its value.
There may be reasons for me not fully understanding it at the time. To help reduce the risk of a bad investment for my overall portfolio, I always keep it diversified.
I’ve been using this approach lately to buy UK stocks that I’ve been selling. Indeed, I recently bought Vodafone this way. I keep looking for deals now!
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