If I had to invest a lump sum of £10,000 today, I would follow the investment strategy laid out by Warren Buffett. He is widely regarded as the world’s greatest ever investor.
Over the past seven decades, he has turned an initial investment of $100,000 from friends and family into a conglomerate worth more than $700bn.
His strategy for finding investments is relatively simple. He is looking for companies with a substantial competitive advantage, which will help them achieve robust profit margins and returns on invested capital year after year.
Unfortunately, it is easier to describe this strategy than follow it. It is all very well to say that I should be looking for corporations with a strong competitive advantage, but constant change is the only constant in the world of business.
Companies are constantly evolving and changing. Competition is rife, and no business can take its position in the market for granted.
This is why Buffett recommends that investors buy low-cost index tracker funds rather than trying to pick stocks. I must admit, this strategy is tempting.
However, as I enjoy studying businesses and picking stocks, it’s not something I really want to follow.
Warren Buffett investments
Therefore, I would invest £10,000 in a basket of companies that I believe have robust competitive advantages. More importantly, I am looking for businesses that invest large sums in maintaining their position in the market.
One company that really stands out is Reckitt. This business owns a portfolio of well-known consumer brands. These tend to command a premium over competitor products, which enables Reckitt to report market-leading profit margins.
More importantly, the company recently laid out plans to invest a minimum of £2bn every year in research and development. This strategy aims to ensure the group stays ahead of the competition and maintains its competitive advantage. That said, Reckitt’s competitive edge should not be taken for granted. If the company understands its large peers, sales growth could start to lag.
I already own this stock in my portfolio for the reasons outlined above and would be happy to buy more.
Unique business
Around five years ago, Buffett acquired the metal fabrication firm Precision Castparts. It produces unique components for the aviation industry and this remains its most significant competitive advantage.
I believe Spirax Sarco exhibits similar qualities. The company designs and produces products for the control and efficient use of steam and other industrial fluids. It is also a leader in its field and has been for over 50 years.
The company also invests significant sums every year developing new products, ensuring it remains at the top of the market. These unique qualities are the reasons why I would buy the stock for my £10,000 portfolio. The organisation seems to have some of the characteristics Buffett always looks for in an investment. Still, I will not be taking its growth for granted. The biggest challenge the firm has to deal with is quality. If the quality of its products declines, customers may go elsewhere.
These two stocks would form the base of my £10k portfolio as they appear to have some of the best Buffett qualities of all UK shares. With these companies in place, I would be happy to invest the rest of the portfolio in a low-cost tracker fund, following the ‘Oracle of Omaha’s’ advice.
