Warren Buffett is one of the greatest investors of all time. Over the past 70 years, he has made an initial investment of $ 100,000 in a company with over $ 700 billion in assets.
I think anyone can learn a lot from looking at the career of the famous investor. I certainly learned a lot. Indeed, if I were to invest a lump sum of Â£ 1000 today, I would take his advice.
Warren Buffett’s advice
Buffett believes investors should only buy high quality companies. These are companies with substantial competitive advantages, which can range from significant economies of scale to global brands.
Two of his favorite companies are Apple and Coca Cola. Both of these organizations have incredible brands that are recognized around the world. This has helped them grow year after year and generate huge profits for their investors.
It focuses on those high quality businesses and ignores low quality businesses no matter how cheap they are. Indeed, he once said: “It is much better to buy a wonderful business at a fair price than a fair business at a wonderful price.“
If I were to invest a lump sum of Â£ 1000 today I would take this advice. However, rather than picking winners based on evaluation alone, I would seek out the best companies in the market and focus on profit margins, competitive advantages, and brand strength.
Buffett also places great importance on the strength of a company’s leadership. He’s looking for highly skilled managers who can run a business through thick and thin, as well as with whatever the world throws at them.
And he also tends to avoid commodity companies such as oil and mining companies. The reason he tends to stay away from sectors is simple. Commodity prices can be very volatile. As such, these companies must hope at best that prices remain high and higher than production costs. It involves a lot of guesswork, which even Buffett can struggle with.
An investment framework
Using all of the above, I was able to put together an investment framework based on his advice. This framework is relatively simple. This suggests that I should only target stocks with strong managers, wide profit margins, strong competitive advantage, and avoid resource companies.
With that framework in mind, I would invest my Â£ 1,000 in businesses like Unilever and Reckitt. These two companies have billion dollar brand portfolios. This is their competitive advantage. They are also run by very experienced management teams, and most importantly, they can set their own prices.
Of course, this strategy might not be suitable for all investors. Finding good companies can be incredibly difficult. Even Buffett is sometimes wrong. This is why he also advocated the use of a low cost passive index fund for investors who may not have the time or experience to find individual companies. This strategy might be more suitable for less experienced investors.
However, if I had a Â£ 1,000 investment today, I would take Buffett’s advice and buy Unilever and Reckitt.
The post How Warren Buffett’s Advice Could Help Me Invest Â£ 1,000 first appeared on The Motley Fool UK.
Rupert Hargreaves owns shares in Reckitt and Unilever. The Motley Fool UK owns shares and recommended Apple. The Motley Fool UK recommended Unilever and recommends the following options: Short Calls March 2023 at $ 130 on Apple and Long Calls March 2023 at $ 120 on Apple. The opinions expressed on the companies mentioned in this article are those of the author and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. At The Motley Fool, we believe that considering a wide range of ideas makes us better investors.
Motley Fool United Kingdom 2021