I’m using the Warren Buffett approach to scoop up cheap UK shares

Different investors have their own ideas on how to find good investment opportunities. Some follow a value approach, looking for shares that trade for less than what they seem to be worth. Others prefer a growth strategy, hoping to win a championship in the future. I use both approaches when selecting UK stocks for my portfolio. But in the end, I think all investment options boil down to a version of value investing. After all, I was trying to buy a big company for less than I thought it would.

Warren Buffett on value investing

This is the approach taken by famous investor Warren Buffett as well.

They don’t buy mediocre companies just because they’re trading below their value. Indeed, Buffett said: “It is better to buy a good company at a fair price than a fair company at a good price.”

But the Sage of Omaha likes to buy stocks that it thinks look too cheap compared to their long-term value. I take a similar approach to finding cheap UK stocks to add to my portfolio.

Price and value

Cheap is an expression of relative value. So I can’t judge whether the stock is cheap just by looking at the price. While price is a critical factor, I also have to consider what I think the true value of the company is.

This can be difficult to do as is often the case when trying to judge how a company may perform in the future. Take an investment in a pub operator JD Wetherspoon precedent. In the long term I expect pubs to remain popular, although I think the decline in beer consumption among young people is a potential risk to profits.

But what about rising costs, from electricity to staff? Is it possible to eat the profit of Spoons? Could it be a recessionary spirit to drink at home?

Clearly, valuing a company is a challenging task. I don’t think that’s surprising: if it were easy, more companies would appreciate it. But I see it as an opportunity for me as an investor. Partly because a lot of people have a hard time valuing the company, I was able to buy the stock for less than I thought it was worth.

Hunt for stocks to buy

This is the approach I am taking now.

For example, at the end of November I bought Super dry because I feel the retailer’s brand and profitable business are worth more than their market capitalization suggests. Since then they have risen over 50% – in less than two months.

I don’t think it’s only in a weak market. No matter what happens in the broader stock market, there are often businesses that investors misjudge or prospects that are stronger than most people think.

So I always look for what I think is a good business, and then I try to respect it. If I can buy a stock for less than I think it is worth, I will consider adding it to my portfolio.