Image source: The Motley Fool
Ought I to buy gold in this time of high inflation? Many people do. But gold does not find favour with investing billionaire Warren Buffett.
He says that people dig gold out of the ground, before burying it in another hole in the ground and paying people to stand around guarding it. In other words, it is not a productive asset.
That does not mean that the price of gold might not soar, especially in uncertain times. As Buffett says, it is way of people “going long on fear”. But in the long term, the best stocks have left gold standing in the dust when it comes to investment returns.
That helps explain why Buffett has built his career – and a huge fortune – by looking for a certain type of share to buy.
Investing like Warren Buffett
So what exactly does Buffett look for when hunting for shares to buy?
His mindset is not that he is buying just a share, but rather than he is purchasing a stake in a business.
I find this can be a helpful practical tool when making my own investment decisions. Take Ocado as an example. Do I see a possibility that its shares will move up? Yes – it has lost 23% so far this year and a positive trading update could see it regain ground in my view.
But would I want to own Ocado as a business? No. It has high capital expenditure requirements and a business model that so far has proven loss-making for much of its existence. So, although I think Ocado shares might move up in price at some point, based on the Warren Buffett mindset, I would not consider adding them to my portfolio right now. I do not want to own the Ocado business overall, so I will not buy its shares.
So, what does Buffett look for?
A simple formula
He looks for something simple: a great business, selling for an attractive price.
A great business, in his view, is one that has a valuable competitive advantage that can help it make profits in a market with resilient customer demand. That could be anything from the unique brand and formula of Coca-Cola or the installed user base of Apple or some proprietary technology.
But with many investors looking to buy into great companies, their share prices can get pushed up. Overpaying can mean that even a great company proves to be a terrible investment. So Warren Buffett is also razor-focussed on buying only when a share price is attractive. Sometimes, that can mean doing nothing for years.
Getting ready to act
Actually, ‘doing nothing’ is not quite accurate.
Warren Buffett spends hours each day reading. He is constantly sharpening his understanding of individual companies that he may invest in at some point. So, he may not be investing – but he is actively preparing to pounce, when the moment is right.
In Buffett’s view, that can involve being “greedy when others are fearful”. That is because in a fear-driven market, great companies can be driven down to bargain prices – offering even small private investors like me a valuable opportunity to buy quality on sale.
