$500 to invest in ASX shares? I'd use the Warren Buffett approach and try and double it!

If you have $500 to invest, take Buffett's advice…

Businessman at the beach building a wall around his sandcastle, signifying protecting his business.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

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.

American Express is an advertising partner of The Ascent, a Motley Fool company. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Motley Fool contributor Sebastian Bowen has positions in Amazon.com, American Express, Apple, Berkshire Hathaway, Coca-Cola, and Vanguard Australian Shares Index ETF. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Amazon.com, Apple, and Berkshire Hathaway. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has recommended Chevron and has recommended the following options: long January 2024 $47.50 calls on Coca-Cola. The Motley Fool Australia has recommended Amazon.com, Apple, Berkshire Hathaway, and iShares S&P 500 ETF. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on How to invest

Men standing together and defending the goal post symbolising defensive shares.
How to invest

Is your ASX share portfolio 'positioned too defensively'?

Being too defensive can cost you in the long run...

Read more »

A young cool man sits in a private jet wearing headphones and casual clothing.
How to invest

My ASX tips: How to become an Aussie millionaire

Stocks can be the ticket to wealth.

Read more »

a man sits on a ridge high above a large city full of high rise buildings as though he is thinking, contemplating the vista below.
How to invest

Why I just sold my biggest ASX stock holding

It's not always about money and the best returns. You need to be able to live with your investment decisions.

Read more »

A young man goes over his finances and investment portfolio at home.
How to invest

How to exploit the ASX's current weakness for long-term gain

Market weakness doesn't need to be the enemy. It can be your best friend.

Read more »

a man in a business suit sits happily leaning back into his hands behind his head with his feet on his desk and smiles broadly.
How to invest

2 things I'm doing to prepare for a 2024 stock market crash

Will the market crash in 2024? Here's why it doesn't matter to me.

Read more »

a smiling picture of legendary US investment guru Warren Buffett.
How to invest

No savings at 40? I'd use the Warren Buffett method to build wealth with ASX shares

Following Buffett's lead could make you a millionaire in the future.

Read more »

Man holding out Australian dollar notes, symbolising dividends.
How to invest

I'd drip feed $200 a month into an ASX share portfolio to target a $20,000 second income

Compounding helps supercharge your portfolio, particularly the longer you leave it.

Read more »

A couple sitting in their living room and checking their finances.
How to invest

If you sold your investment property and bought ASX shares, would you make more money in dividends than rent?

Transitioning between these two asset classes will create a loss of investment capital. Does this matter?

Read more »