If you're just starting out with investing and have $500 to put towards some ASX shares, you're doing your future self a big favour. Investing in ASX shares is one of the best paths to wealth available to most of us. So getting started as soon as possible is a great way to build long-term wealth.
But choosing the right shares can be a hard ask, especially for a beginner. So with that in mind, let's talk about how the Warren Buffett approach can help you succeed when it comes to investing.
Warren Buffett, the legendary US investor and CEO of Berkshire Hathaway Inc (NYSE: BRK.A) (NYSE: BRK.B), has built his US$120 fortune over more than six decades of stock-picking prowess. Luckily for us, he is extremely generous with giving out investing wisdom on a regular basis.
I think two of Buffett's teachings are particularly relevant here.
Warren Buffett's advice to the passive investor
Firstly, Buffett tells us that you don't have to be a stock picker to successfully invest in shares. In fact, he reckons that most investors would be better off just sticking to broad-market index funds, such as the iShares S&P 500 ETF (ASX: IVV) or (for the ASX) the Vanguard Australian Shares Index ETF (ASX: VAS).
In justifying this view, here's some of what Buffett wrote in his 1993 letter to the shareholders of Berkshire Hathaway:
Another situation requiring wide diversification occurs when an investor who does not understand the economics of specific businesses nevertheless believes it in his interest to be a long-term owner of American industry.
That investor should both own a large number of equities and space out his purchases. By periodically investing in an index fund, for example, the know- nothing investor can actually out-perform most investment professionals. Paradoxically, when "dumb" money acknowledges its limitations, it ceases to be dumb.
Backing up this view more recently, here's another quote from Buffett on this matter from 2020:
So, find businesses — get a cross section. In my view, for most people, the best thing to do is to own the S&P 500 index fund. People will try and sell you other things because there's more money in it for them if they do.
I'm sure Buffett would agree that investing in an index fund with your first $500 is a smart way to get started.
For the budding stock picker
But many investors don't want to just stick with index funds, preferring a more active, stock-picking approach. Buffett has plenty of advice for these investors too. I think his most important tip comes from way back in 1995.
Buffett was asked at the 1995 Berkshire shareholder meeting about what kind of economic principles he uses when choosing stocks. Here's how Buffett answered:
But the most important thing you can… is find a business with a wide and long-lasting moat around it, surrounding, protecting a terrific economic castle with an honest lord in charge of the castle…
What we're trying to find is a business that, for one reason or another — it can be because it's the low-cost producer in some area, it can be because it has a natural franchise because of surface capabilities, it could be because of its position in the consumers' mind, it can be because of a technological advantage, or any kind of reason at all, that it has this moat around it…
All moats are subject to attack in a capitalistic system, so everybody is going to try and — if you've got a big castle in there, people are going to be trying to figure out how to get to it… But we are trying to figure out what is keeping — why is that castle still standing? And what's going to keep it standing or cause it not to be standing five, 10, 20 years from now. What are the key factors? And how permanent are they? How much do they depend on the genius of the lord in the castle?
And then if we feel good about the moat, then we try to figure out whether, you know, the lord is going to try to take it all for himself, whether he's likely to do something stupid with the proceeds, et cetera. But that's the way we look at businesses.
It's this pursuit of companies with this 'moat' characteristic that has always defined almost all of Berkshire's major stock buys.
Think about Coca-Cola, American Express, Apple, Chevron, Amazon, and all of the other shares Berkshire owns in its portfolio. These businesses usually have something special (Coke's brand and pricing power for example) that enables them to dominate their competition.
If you want to find an individual stock for your first $500, Buffett might tell you to make sure it has something similar that it can use to protect its own 'castle' for decades to come.