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Stocks and Shares ISA: how to build a portfolio like Warren Buffett

Buffett at the BRK AGM
Image source: The Motley Fool

The Stocks and Shares ISA is a tax-efficient vehicle for my investments. It’s essentially a tax wrapper that can be opened through a variety of institutions — I use the Hargreaves Lansdown platform to manage mine.

I’ve had a Stocks and Shares ISA for years, and I’ve been managing it myself for a while. But, looking back, I wish I had been more strategic, and followed the teachings of some of the world’s top investors.

One is Warren Buffett. He’s the chairman and CEO of Berkshire Hathaway. He’s also one of the most successful investors of his generation and has a net worth of over $100bn, as of November 2022. As a result, he’s the world’s sixth wealthiest person.

So let’s see how I could build a portfolio like Buffett.

Value investing

Value investing is the art of buying stocks which trade at a significant discount to their intrinsic value. Value investors like Buffett achieve this by searching for stocks that trade with low multiples of their profits or assets.

Finding these stocks requires us to look at valuation metrics. There are the simple ones like the price-to-earnings ratio, or EV-to-EBITDA. Then there are the more complex and often more telling ones, such as the discounted cash flow model.

Buffett always searches for a margin of safety between what he sees at the company’s value and its stock price. This characteristic helps him avoid losing money.

This value investing approach often requires a contrarian mindset, meaning I don’t follow the crowd, and a long-term investment horizon. Over the last century, a value investment strategy has more often than not outperformed index returns in most markets.

Investing in quality

Buffett says he’d rather pay a fair price for an exceptional stock than pay an exceptional price for a fair stock.

He’s not interested in distressed stocks, but wants to focus on those that have a strong long-term offer. For example, some of Buffett’s largest investments are in household names like Apple and Coca-Cola.

Obviously, buying household names doesn’t guarantee success, but it reflects his mantra of investing in top quality stocks that rise to the top.

Stick to what I know

By sticking to what I know, I’m definitely limiting the scope of my investments. But it makes sense because how can I truly assess the value of a company if I don’t understand what it does or the industry in which it operates?

So even if I do spot a tip regarding the next big social media/entertainment platform, perhaps I should stay away from it. It’s not that I’m a dinosaur that doesn’t understand the industry, the problem is I struggle with valuations in the sector.

Take a long position

Buffett always invests for the long run. He does sell, but his long-term approach reflects his belief and commitment to the investment.

So by following these simple Buffett teachings, I’m hoping to built a portfolio like the ‘Oracle of Omaha’. I appreciate I’m not going to match him on worth, but I can do my best to reflect his teachings.

The post Stocks and Shares ISA: how to build a portfolio like Warren Buffett appeared first on The Motley Fool UK.

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James Fox has positions in Hargreaves Lansdown Plc. The Motley Fool UK has recommended Apple and Hargreaves Lansdown Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2023