How I’d follow Warren Buffett to invest £1k

Warren Buffett has been investing for over seven decades and, during this time, he has turned an initial investment of $100,000 into a fortune of more than $100bn. 

It is safe to say the billionaire knows a thing or two about the stock market and how to invest money for the best returns. 

That is why I would follow his advice if I had to invest a lump sum of £1,000. 

Buffett’s investing advice

Buffett, or the ‘Oracle of Omaha’ as he is sometimes known, has said that the best way for investors to deploy a small lump sum is to buy a low-cost passive index tracker fund. 

This is the best option for investors who may not have the skills (or time) to follow the stock market. That is one approach I could use to invest my £1,000 lump sum. However, as I have a keen interest in stocks and shares, I am more comfortable following his advice for buying individual securities. 

Whenever Buffett looks for a stock, the first question he asks is whether or not he understands the company. Put simply, he is trying to figure out if he can understand how the business makes money and where it will be 10 years from now. 

More often than not, he cannot answer these questions. That is why he only makes a handful of investments every year. 

I would use a similar approach, looking for companies where I can understand how they will grow and develop over the next decade. 

One such company is finance provider S&U. The group provides motor and property specialist financial services and is still majority-owned by its founders.

These founders have a vested interest in making sure the company provides a positive outcome for its investors.

Further, I think there will always be a market for these products. That is why I would buy the stock for my Warren Buffett-style portfolio. Some challenges it may face include additional regulations and higher interest rates, which could reduce profit margins. 

Unique market position

Another organisation I would acquire is H&T. This company provides a range of financial services and products tailored to individuals with limited access to the traditional banking sector.

Once again, this is another market that is likely to be around 10 years from now, and it is one that requires specialist knowledge. H&T has this knowledge, which is why I think the stock can continue to expand over the next decade. 

Challenges it could face include an economic downturn, which may increase loan losses and reduce demand for its products.

I should make it clear that these are not the sort of businesses Buffett would buy himself. They are companies that I would buy, based on his mentality.

It is never sensible to blindly follow other investors into stock positions, which is why I would pick these organisations based on my own financial knowledge, using a framework developed by The Oracle. 

Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has recommended S & U. 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.