Warren Buffett is widely regarded as the greatest stock market investor of all time. Over the long term, he has generated returns of around 20% per year, building up a fortune in the process. Here I’m going to show how investors can employ his investment strategy within a Stocks and Shares ISA. I’m also going to highlight a Buffett-owned stock I like the look of today.
A focus on quality
A lot of people see Buffett as a ‘value’ investor. But the fact is, he’s more of a ‘quality’ investor. He likes to invest in companies that have wide economic moats, high returns on capital (high profitability), and strong balance sheets (low debt). And he’s happy to pay a higher valuation for these kinds of companies.
Some names in his portfolio today include Apple, Coca-Cola, and Mastercard. These businesses all have high-quality attributes (e.g., strong brands, dominant market positions, etc.) and have been excellent long-term wealth generators. These are the kinds of companies I’d be looking to buy for my Stocks and Shares ISA today if I was trying to invest like Buffett.
Diversification
Now, Buffett likes to diversify his capital across many different companies to reduce his risk. Yet he has an interesting approach to diversification.
While his investment company, Berkshire Hathaway, owns over 40 stocks, 75% of the capital is invested in just five of them – Apple, Bank of America, American Express, Coca-Cola, and Chevron.
This tells us that he’s not afraid to make bigger bets on companies he’s really bullish on.
If I was looking to invest my ISA like him, I might consider allocating more capital to companies I was really confident in.
Long-term mindset
Finally, Buffett takes a very long-term approach to investing.
For example, he first invested in Coca-Cola back in 1988. So, he has been an investor there for over 30 years.
This long-term mindset has paid off. Back in 1988, Coca-Cola shares were trading for around $2.50 to $3.00. Today, they are at $60 and the annual dividend is about $1.80 per share.
If I wanted to emulate the stock market guru, I would adopt a long-term buy-and-hold strategy within my ISA.
A Buffett stock I like today
As for the Buffett stock I want to highlight, it’s Visa (NYSE: V). It operates one of the largest electronic payments networks in the world.
This stock just strikes me as a no-brainer for long-term investors like me.
Over the next decade, trillions of transactions are set to shift from cash to credit card. So, Visa is going to have huge tailwinds behind it.
The beauty of this company, however, is that it has no credit risk. Unlike American Express, it doesn’t issue credit cards. It simply operates the payments network, taking a slice of each transaction.
Now, Visa does have an above-average valuation. Currently, its P/E ratio is about 28. This adds some risk to the investment case.
However, as Buffett says: “it’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price”.
The post How to invest a Stocks and Shares ISA like the legendary Warren Buffett appeared first on The Motley Fool UK.
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Ed Sheldon has positions in Apple, Coca-Cola, Mastercard, and Visa. The Motley Fool UK has recommended Apple, Mastercard, and Visa. American Express is an advertising partner of The Ascent, a Motley Fool company. 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.
Motley Fool UK 2024
