Warren Buffett has proven his expertise many times during his illustrious investing career. The Oracle from Omaha has accumulated a net worth of US$107 billion after leading his holding company Berkshire Hathaway Inc (NYSE: BRK) for 57 years.
Yet, you won't find Buffett trawling through Reddit forums for his next investment. Nor will you find him betting the home on an unproven and unprofitable business model. The legendary investor is not one to treat the market like entertainment, carelessly speculating on a boom or bust story.
Instead, Buffett sticks to the principles of value investing. Looking at the performance of Berkshire shares over the last 40 years, it's hard to argue with the approach. They've achieved an astonishing 60,100% return.
With that in mind, here's how I'd go about investing $2,000 like Warren Buffett.
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Play to your strengths
There are 2,351 companies listed on the Australian Securities Exchange, operating in many different industries. Trying to have an in-depth understanding of every company and all the various industries in which they do business is a senseless undertaking.
The reality is there are many areas of the market that are simply not within our circle of competence. If you're a fish, your time is better spent swimming in the water, not trying to climb trees… To this point, Buffett said, "Never invest in a business you cannot understand."
That's why if I was looking to deploy $2,000 soon, I'd first start looking at the sectors that I feel most confident in analysing. For me personally, those are ASX tech shares and consumer discretionary shares.
Warren Buffett on when to buy
Once you've done the heavy lifting of researching and identifying companies that could be worthwhile investments, the next question is: What about the price?
The price you're willing to pay for a company can be dependent on many factors. You might prefer to keep it simple and compare the price-to-earnings (P/E) ratio of the company to its industry average. In addition, you might weigh up the price-to-book (P/B) ratio to consider whether the company could be good value based on its balance sheet.
If and when you deem a company to be at a discount to what you believe is the intrinsic value, the next action is to invest. Some might try to wait for an even cheaper price, though Buffett would argue otherwise, stating:
Don't pass up something that's attractive today because you think you will find something better tomorrow.
Forever mindset
The last Buffett-ism I would consider before investing $2,000 is based on his mantra, "Our favourite holding period is forever."
To really reap the fullest rewards of investing, you need to be able to hold a great business long enough to let compounding take hold. That means weathering a few storms and riding a few rollercoasters.
Before pulling the trigger on an investment, I'd ask myself: would I be happy to own this company forever if all the fundamentals remain solid? If the answer is yes, we have a winner! If the answer is no, then it may not be worth a spot in the portfolio.
