Stock market

I will use Warren Buffett’s method for picking shares.

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Many people hope to do very well in the stock market. But few have done as well as billionaire Warren Buffett.

Buffett is open about the investment approach he has honed over decades in the stock market. Using some of the lessons from my career, I hope I too can create wealth.

Stick to your knitting

What is striking about Buffett’s portfolio is that it contains many names of very large, well-established companies such as apple And Coca Cola (NYSE: KO).

He doesn’t invest in small firms in business areas he doesn’t understand, hoping they’ll be next Nvidia or Amazon. Instead, he sticks firmly to business areas that he understands and can therefore evaluate.

Investing in something you don’t understand is speculation, not investment. Like Warren Buffett, I aim to stick to my knitting.

Hunt for the victors

Although after landing on a wide area as an investment idea, Buffett doesn’t stop there.

There are many companies that manufacture soft drinks. So why did he choose Coca-Cola in particular?

Warren Buffett looks for what he calls a ‘moat’ – basically, something that differentiates a business from its competition.

In the case of Coca-Cola, such competitive forces are substantial. For example, it has unique and well-known brands, a proprietary cola formula and a strong worldwide distribution network.

After landing on an area in which to invest, Buffett looks for which firms have competitive strengths that can help them emerge as winners in that area.

The importance of value

But while Warren Buffett still likes Coca-Cola enough to own shares, he hasn’t bought any more in decades.

I don’t know why, but I suspect it’s partly on diagnostic grounds. Coca-Cola shares are worth much more than when Buffett bought them in the 1980s and 1990s.

But the company faces risks. For example, rising health consciousness among consumers could hurt demand for sugary drinks, which could threaten sales volume. The shares don’t necessarily look like the bargain they did when Buffett bought them.

Warren Buffett often talks about the importance of valuation when investing. Specifically, he describes himself as aiming to buy into great companies at an attractive price. I do the same.

Finding Shares to Buy

I think many of Buffett’s lessons apply to both sides of the pond.

When looking for stocks to buy for my portfolio, I stick to sectors I think I understand and try to identify companies that have strong competition. I also consider the size of the potential customer market – how big is it today and what are its future prospects?

I spread my ISA into different shares like this. Importantly, I focus not only on finding the right companies, but also on buying them when their share prices are attractive.

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