Could thinking like Warren Buffett help create a market-beating ISA?

With the annual contribution deadline for Stocks and Shares ISAs around the corner, many people’s minds are focussed on using up as much of their allowance as they can. But as Warren Buffett showed with his first investments as a schoolboy, even modest-sized investments can be rewarding for someone with a long-term approach and smart approach to the markets.

So, whether with a £20k ISA, a £250k ISA, or simply an ISA with a spare £250 in it, how might someone learn from the Sage of Omaha when it comes to trying to beat the market with their ISA?

Common sense principles apply, no matter the amount

Warren Buffett is pretty clear about some of the basic elements of his investing approach.

For example, for decades he has emphasises not putting all your eggs in one basket, sticking to businesses you feel you understand, building in a margin of safety when valuing a share, and not putting at risk any money you cannot afford to lose (painful though any loss may still be).

Those make sense when investing billions – but they apply equally when putting just a few hundred pounds to work in the stock market.

A few great shares beat lots of merely good ones

Although Buffett diversifies, he does not massively diversify.

Beating the market involves doing better than it. Say you only invest in the 10 shares in the FTSE 100 that do best, by definition you will beat the index. You may even thrash it.

The challenge, of course, is that nobody – not even Warren Buffett – can know in advance how a share will do. Even a brilliant business can run into unforeseen or perhaps unforeseeable problems.

Still, Buffett’s approach has proven successful in beating the market over the long run.

Indeed, between 1965 and 2024, Berkshire Hathaway under his control managed a 5,502,284% change in per-share market value. During that timeframe, even with dividends included, the S&P 500 managed a far more modest (though still impressive) 39,054%.

One thing Warren Buffett always looks for when hunting for great businesses is whether they have an enduring competitive advantage – what he calls a “moat”.

A classic Buffett pick explained

To illustrate that concept, an example is Coca-Cola (NYSE: KO). Berkshire bought a stake decades ago and still holds it, earning hundreds of millions of pounds in dividends annually.

Say someone wanted to replicate the distribution system Coke has built worldwide. Could they do it?

I am not sure. Even if they could, it would take decades and be hugely expensive.

What about building a cola brand to rival Coca-Cola?

Many have tried, from PepsiCo to A G Barr (though to be accurate, perhaps Coca-Cola was rivalling the Cumbernauld firm not the other way around, as Barr’s Cola predates the US brand). Yet Coca-Cola remains dominant.

Plus, of course, Coca-Cola has a unique secret recipe.

All of this adds up to a massive moat.

Times change, of course, and Coca-Cola faces business risks today it did not a decade ago, like the rise of weight-loss drugs and geopolitical whiplash against US brands in the current climate of international relations.

Still, Coca-Cola has been raising its dividend per share annually for decades. A strong moat can go a long way!