With the annual deadline for Stocks and Shares ISA contributions coming up in the next few days, I have been considering how I ought to invest my related money. One approach I take is learning from proven investment masters like billionaire Warren Buffett.
Here is a trio of principles used by the so-called ‘Sage of Omaha’ that I apply when buying shares for my ISA.
Focus on value, not price
It is easy to look at shares with a seemingly low price and imagine the returns made if they ended up trading for pounds not pennies.
As an investor, my goal is to increase my money. To do that, I try to buy good quality assets for less than they are worth. So a share price alone tells me nothing. Instead, I ask myself whether buying a particular share gives me the chance to buy a stake in a brilliant business for less than it is worth.
As Buffett says, price is what you pay, but value is what you get. Even a share that sells for pennies can get cheaper. To try and build wealth, I follow Buffett in focusing on value, not price alone.
Be ruthlessly selective
There are always a few shares in the market I find tempting – and sometimes there are a lot.
But Buffett did not become a billionaire by taking a scattergun approach to investing. He is highly selective about what he buys, sometimes going for years at a time without making a big purchase.
Buffett has explained this approach by saying that most investors would do better if they imagined themselves as having a punch card with 20 spaces on it. Each time they make an investment they should imagine punching one of those spaces and so ask themselves whether this investment merits it.
Taking that approach, I would end up making very few, carefully-considered investments. By concentrating my investments in a small number of what I see as outstanding companies, hopefully I could improve my long-term performance.
Buy to hold
A Stocks and Shares ISA can make a good vehicle for long-term investment.
Buffett has said that his preferred holding time for shares is ‘forever’. In reality, that is not always what happens. Buffett has owned shares in Coca-Cola and American Express for decades, but he has sold other stocks over the years, such as British firms including Tesco and the predecessor of Diageo.
The principle is clear though. Buffett’s reasoning is that if buying stakes in companies with brilliant business models, why sell? Over the years, hopefully the business will do well and that can benefit shareholders.
This is illustrated by Buffett’s massively profitably investment in Apple. Not only has the business performance stayed strong, but the company’s share buyback programme has increased the proportion of the tech giant Buffett owns even without him putting more money into it.
Like Buffett, I buy to hold. If I have a stake in a brilliant company, hopefully its future performance can lift the long-term value of my ISA.
