If I had a lump sum of £5k to start investing with today, I would follow the advice of Warren Buffett. Generally considered the best investor of all time, the billionaire has a few strict rules when it comes to buying stocks. He will only invest in a company he understands, and he will only buy profitable businesses.
These rules do limit the number of companies he can look at. But that is the point. Buffet knows he cannot possibly analyse every business on the market, so he does not try. Instead, he focuses his time on corporations he knows the best.
Buffett likes to focus on high-quality businesses. These tend to be firms with a strong competitive advantage that can be used to outperform the competition. He is also looking for companies with robust balance sheets and long runways for growth ahead of them.
I would follow this road map to invest a lump sum of £5k in the stock market today.
Warren Buffett stocks
I believe a handful of businesses currently fit into this framework. One firm that immediately stands out to me is industrial machine designer and producer Renishaw. This company manufactures equipment for the highly specialised technology and industrial sectors. It has a commanding position in the industry and an excellent reputation with its customers, by all accounts.
Renishaw’s reputation alone is the company’s most significant competitive advantage. Its clients are not going to want to spend money on sub-standard equipment. So they are prepared to pay a premium for this group’s experience. That is why I believe the establishment has all the hallmarks Buffett looks for in an investment.
Unfortunately, the company’s competitive advantages are not guaranteed. As is the case with all businesses, Renishaw will need to keep investing to stay ahead of the competition. It cannot take its position in the market for granted. If the enterprise starts to neglect its customers, sales could fall. This is the biggest challenge the group will face going forward.
Growing business
I also believe distribution group Bunzl has Buffett-like qualities. This company’s competitive advantage is its size. It operates in the distribution sector, which tends to have razor-thin profit margins. In this market, size counts. And the corporation certainly has the size and the scale required to outperform its smaller peers.
It has a great track record of complementing organic growth with bolt-on acquisitions, and management has identified enough new acquisitions to support growth for the next couple of years. Like Renishaw, Bunzl will also have to make sure it keeps investing enough in growth, or the competition could leave it behind.
Considering these qualities, I would invest £2,500 each in these Buffett-style companies. I think these businesses are some of the best corporations on the London market, and I would like to be part of their growth story.
The post How I’d follow Warren Buffett to invest £5k today appeared first on The Motley Fool UK.
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Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has recommended Bunzl and Renishaw. 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.