How I’d invest £5k in an ISA the Warren Buffett way

Image source: The Motley Fool

The first reason I admire Warren Buffet is that he is renowned as one of the most successful investors in the world. The second reason I admire the Oracle of Omaha is that she has a personal fortune exceeding $102 billion, making her the fifth richest person in the world.

The third reason I’m a huge Warren Buffett fan is, along with Bill Gates, he is one of the most generous philanthropists in the world. ‘Uncle Warren’ has donated tens of billions of dollars to good causes – and he intends to give away 99% of his entire fortune before his death. And the fourth reason I adore Warren is for the simple, simple, yet powerful wisdom he freely shares with the world.

How I invest today the Warren Buffett way

If I started today as a novice investor, here are four quotes from Warren Buffett that I would use to invest £5,000 into the ISA:

1. “The worst investment you can have is cash. Cash will become less valuable over time.”

Currently, UK inflation (cost of living increase) is hot at 9.4% per year. Over time, rising prices will erode the value of my savings. Therefore, I would put them to work in the stock market, buying fair value or cheap stock in big business. And I’ve been doing this aggressively since June.

2. “It is much better to buy a good company at a reasonable price than a good company at a good price.”

In the first half of 2022, when global stock prices fell, I invested very little in stocks and stocks. But Warren Buffett showed me that it’s okay to pay a fair price or even a premium to invest in a quality company. For example, I recently bought America’s second-largest supermarket chain, after its stock fell nearly 50% from a 52-week high. This is a big company and I thought I bought the stock cheap.

3. “Never invest in a business you cannot understand”.

Since June 29th, my wife and I have invested some money into 10 new stocks. These include well-known British banks, insurance companies, home builders, and global miners. To me, this is all a simple and easy to understand company with a clear and simple business plan. What’s more, all generate a lot of cash flow and pay generous dividends to shareholders. Nothing to lose, tech stock ‘tomorrow clock’ for me, thanks.

4. “The best opportunity to use capital is when things are down”.

Warren Buffett made this comment in an interview about stock buybacks in February 2018. For me, this approach is an important part of my investment strategy. I love buying down-market stocks at a discount, just as I enjoy buying discounted consumer goods. Indeed, many of the 10 stocks we bought recently have fallen 25% to 50% from their previous highs. As an old school northerner, I like to haggle, I am.

In short, my investment goal is — as Warren Buffett said in 1991 — “Just buy something for less than it’s worth.” By buying stock in an ISA and holding it for years, my cash dividends and capital gains (profit on sales) can snowball tax-free. And this tedious and safe approach to ISA investing has been helping me for the last 35 years!

Please note that tax treatment depends on each client’s individual circumstances and may change in the future. The content in this article is provided for informational purposes only. This is not intended to be, nor does it constitute, any form of tax advice. Readers are responsible for conducting their own due diligence and for obtaining professional advice before making any investment decisions.