[date-today format='F j, Y']

How I’d build a diversified portfolio of UK stocks like Warren Buffett and Charlie Munger

Stephen Wright outlines what UK shares he would buy to follow Warren Buffett and Charlie Munger's advice for building a diversified portfolio. The post How I’d...
Photo by xresch

Warren Buffett and Charlie Munger agree that the key to investing is to invest only in the very best opportunities available. Having 10 investment ideas and putting money into the tenth one instead of the first or second one is a mistake. Charlie Munger puts the point like this:

Warren [Buffett] always says that if you lived in a growing town and you owned stock in three of the best enterprises in town, isn’t that diversified enough? The answer is of course it is—if they’re all wonderful places. […] The whole idea of diversification when you’re looking for excellence, is totally ridiculous. It doesn’t work. It gives you an impossible task. 

The most recent 13F filing from Berkshire Hathaway, however, reveals that the company has around 46 investments in US stocks. Buffett and Munger therefore do own a diversified portfolio. So how should an investor like me think about diversification?

The answer is that I should try to build a diversified portfolio of stocks over time. And I should do this by buying whatever I think are the best stocks for me to buy at the current time. If the most attractive stock for me to buy right now is Berkshire Hathaway, then I should buy Berkshire Hathaway shares right now. But Berkshire won’t always be the most attractive investment opportunity on the market. When something else, such as Legal & General is the most attractive investment opportunity, I should add Legal & General shares to my Berkshire Hathaway holdings. The question is, what should I buy first? 

Where to start?

I have two ideas to get started. The first is Howden Joinery Group  (LSE:HWDN). The second is Rightmove (LSE:RMV). At the moment, these stocks look equally attractive to me, so I’d probably start my portfolio with investments into both of these.

Howden Joinery Group supplies UK homebuilders with kitchen and joinery products. This investment looks risky given the high price of commodities, but there are three things that attract me to this company. First, the company is in a strong financial position. The interest it pays on its loans takes up only 1.34% of its operating income. Second, the company trades at an attractive valuation. It has a market cap of just over £4.6bn and generated just over £300m in free cash flow last year. Third, the company is efficient. Its returns on invested capital are in double-digits and have been consistently over the past five years.

Rightmove is the UK’s largest online property platform. Unlike Howden Joinery, the stock is currently expensive, which presents an investment risk. But I think that the underlying business is arguably the best in the UK, which means that I would buy it today if I were building a portfolio of UK stocks. Like Howden Joinery, Rightmove is in an extremely strong financial position. The company’s current assets comfortably cover its long-term liabilities. It has also been growing fast. Retained earnings have increased from just over £11m in 2018 to just over £133.25m by the end of 2020. The company’s size also gives it a huge advantage over its competitors, making it hard to disrupt.

If I were looking to build a portfolio of UK stocks in the style of Warren Buffett and Charlie Munger, I’d start by buying shares in Rightmove and Howden Joinery Group.

The post How I’d build a diversified portfolio of UK stocks like Warren Buffett and Charlie Munger appeared first on The Motley Fool UK.

FREE REPORT: Why this £5 stock could be set to surge

Are you on the lookout for UK growth stocks?

If so, get this FREE no-strings report now.

While it’s available: you’ll discover what we think is a top growth stock for the decade ahead.

And the performance of this company really is stunning.

In 2019, it returned £150million to shareholders through buybacks and dividends.

We believe its financial position is about as solid as anything we’ve seen.

Since 2016, annual revenues increased 31%
In March 2020, one of its senior directors LOADED UP on 25,000 shares – a position worth £90,259
Operating cash flow is up 47%. (Even its operating margins are rising every year!)

Quite simply, we believe it’s a fantastic Foolish growth pick.

What’s more, it deserves your attention today.

So please don’t wait another moment.

Get the full details on this £5 stock now – while your report is free.

More reading

1 FTSE 100 stock to buy and hold for 10 years
Best British stocks for March
Here’s why this FTSE 100 growth stock is flying today
3 shares to buy in the stock market carnage
I’m following Warren Buffett and buying these quality UK shares

Stephen Wright owns Berkshire Hathaway (B Shares) and Legal & General. The Motley Fool UK has recommended Howden Joinery Group, Rightmove, and Tesco. 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.





© 2022 The Daily Encrypt. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.

Latest News