Image Source: The Motley Fool
When it comes to investing, not many people have as strong a track record as billionaire Warren Buffett. That’s why I apply some of the principles used by Sage of Omaha when looking for stocks to buy for my portfolio. My main focus is on UK stocks, not US ones, but I think the same principles apply on both sides of the pond when it comes to looking for bargain investments! This is how I’m doing it right now.
Be clear about the value
Successful investing relies on being able to identify value, whether it’s obvious or hidden in plain sight.
If I pay more for a share than it is worth, in the long run it is unlikely that I will do well in the stock market. But if I can find stocks that sell for less than their intrinsic value, ideally much less; then over time I hope that value shines through and my investment pays off.
different approaches
Detecting value can be difficult. Different investors use a variety of methods to determine it. In fact, such a variety of opinions about the value of a given stock helps explain why the value of stocks fluctuates even when the business itself is stable.
Valuation is not easy. Think of a company like ITM powerthat is deficient, or miner gold of the great lands that not only generates losses, but also does not generate income. On what basis should UK stocks like these be valued?
Looking for big companies
The answer is a matter of individual investment choice. That choice can have big financial consequences. After all, as an investor, I look to buy chunks of companies for less than I think they’re worth.
I start by looking for companies that I think have outstanding business prospects. Although I prefer a company to have a business model that has already proven profitable for it, this assessment is prospective. So I look to see if a company has assets like unique technology or a strong brand that can help them reap long-term benefits from customer demand.
How to value stocks
Then I look at the financials of a company. For example, if you have big profits but also big debts, then you can lower your dividends.
We’ve seen that scenario play out before in vodafone. The telecom giant’s current share price suggests some investors see the risk of it happening again.
In general, understanding the future prospects of a company and its finances can help me put a rough value on it. If I can’t do that, for example, because your accounting methods are too vague or the business outlook is too unpredictable, then normally I just wouldn’t invest.
I am buying UK stocks
But sometimes I see a part that I think is “on sale” compared to its value.
There may be a reason I don’t fully understand at the time. To help reduce the risk of such bad investments for my overall portfolio, I always keep it diversified.
I have been using this approach lately to buy UK stocks that I think are for sale. In fact, I recently bought Vodafone using just this method. I’m still looking for bargains right now!
