Image source: The Motley Fool
Super-investor Warren Buffett is now a billionaire many times over. But his stock market beginnings were very humble. Schoolboy Buffett saved money from a paper round so he could start buying shares.
So while £800 might not sound much for an investor to get into the stock market for the first time, I think it is ample. It is enough to diversify and also means dealing fees and costs could be proportionately lower than if investing a smaller amount — as long as the investor pays attention to how to minimise such fees, as I explain below.
They could even apply some of Buffett’s accumulated wisdom as they do so.
Weighing both sides of an investment case
For example, one common mistake when people start buying shares is focusing on how much money they could make if one performs brilliantly. That is understandable. People invest to try and build wealth.
But it is important, from day one, to pay as much attention to the risks of a potential investment as to how it could perform if things go well.
Spreading the money – and risk
That also helps explain why billionaire investors like Buffett do not put all their eggs in one basket. They diversify across different shares.
With £800, an investor could easily do the same.
Think of buying a bit of a business
Another common mistake when people start buying shares is looking at the share price alone. Has it slumped? Does it look like it is starting to turn? Is it far lower than a previous high?
Share price definitely matters. But not in isolation. It matters in context. What is an investor paying relative to what they get back in return?
To understand that requires an understanding of the business itself and whether it is attractive. Buffett thinks not in terms of buying a piece of paper with a company name on it, but rather a stake in a business. So he assesses the attractiveness of the business itself.
What makes for a great business?
As an example, consider Buffett’s biggest shareholding: Apple (NASDAQ: AAPL). I think this has the hallmarks of a great business. The market of potential and actual customers is huge and likely to remain that way.
Thanks to its unique brand and technology, Apple has pricing power. That enables it to make juicy profit margins. Its user ecosystem means that it takes a lot for customers to abandon Apple and start their digital lives afresh on another type of phone.
That said, there are risks. For example, Apple’s phones are pricy. In a weak economy, I think increasingly sophisticated but cheaper phones from Chinese brands could steal market share from Apple.
On balance though, Apple is a company in which I would happily invest (and have in the past). But I have no plans to start buying shares in the tech giant.
Why? Share price, pure and simple.
Even a great business can be a rotten investment if one overpays for it.
Investing cost effectively
Billionaires like Buffett got rich partly by keeping a close eye on costs. They can eat into investment returns.
So, an investor even with just £800 ought not to start buying shares before finding a share-dealing account or Stocks and Shares ISA that suits their individual needs.
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