How do you know if a UK stock is undervalued?

Compare its share price to its intrinsic value — the discounted value of the cash the business will generate. If the price sits meaningfully below that, and the company has strong returns on equity and low debt, it may be genuinely undervalued rather than simply cheap.

Are UK shares cheaper than US shares?

UK-listed companies have generally traded on lower valuation multiples than comparable US companies in recent years. That can create opportunity, but a lower multiple alone doesn't make a share good value — the underlying business quality still has to hold up.

What is a value trap?

A value trap is a share that looks cheap but is priced low because the business is genuinely declining. Checking return on equity, cash flow and debt levels is what separates a real bargain from a value trap.

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Warren Buffett's investment strategy

Buffett's approach is unusually simple to describe and unusually hard to follow. Buy a business you understand, with a durable competitive advantage and management you trust, at a price below what it is worth — then do very little.

By Nathan Wickham-Hurd · Founder, Oak Growth · First-class Economics & Finance, MBA · Last reviewed July 2026

He buys businesses, not tickers

The central shift is treating a share as partial ownership of a company rather than a line on a screen. If you would not want to own the whole business for a decade, the question of whether the shares go up next month is not really an investment question.

That framing does the heavy lifting. It rules out most speculation immediately, because you cannot own a business you cannot describe.

The four things he actually looks for

1. A business you can understand. Not simple — understandable. Buffett avoided technology for decades not because it was bad, but because he could not judge what it would look like in ten years.

2. A durable competitive advantage. The economic moat — something protecting profits from competition. Brands, switching costs, network effects, low-cost production, regulatory position.

3. Able and honest management. How capital gets allocated, whether the reporting is candid, whether incentives point the same way as shareholders'.

4. A sensible price. Even an excellent business is a poor investment if you overpay. This is where margin of safety comes in.

Quality first, then price

Early Buffett, trained by Graham, bought statistically cheap companies almost regardless of quality — "cigar butts" with one puff left. He later called that a mistake, having concluded that a fair price for a wonderful business beats a wonderful price for a fair one.

The reason is compounding. A business earning high returns on capital grows shareholder value year after year without you doing anything. A cheap, mediocre business gives you one re-rating if you are lucky, and then you need another idea.

The measure he keeps returning to is return on equity — and specifically, whether it stays high for years without heavy borrowing propping it up. Sustained high returns on capital are the numerical fingerprint of a moat.

Price discipline

Buffett's valuation work is closer to owner earnings than to reported profit — the cash a business genuinely generates for its owners after the spending needed to maintain its position.

He then insists on paying meaningfully less than that estimate. Not because the estimate is precise, but because it isn't. The discount is protection against being wrong, which is a very different mindset from forecasting confidently.

Then the hard part

Most of the strategy is inaction. Holding through downturns, refusing to buy when nothing is cheap, sitting on cash for years, ignoring what everyone else is doing. Buffett has said the stock market is designed to transfer money from the active to the patient.

None of that is intellectually difficult. It is temperamentally difficult, which is why the method is widely known and rarely practised.

What this does not mean

Buffett's record is exceptional and not obviously reproducible. He operated at a scale that gave him access to deals no individual can reach, and his early returns came from a much less efficient market than today's. Following the principles is sensible; expecting the outcomes is not.

Screen 1,000 companies on Buffett's four pillars

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Common questions

What is Warren Buffett's investment strategy in simple terms?

Buy businesses you understand, that have a durable competitive advantage and trustworthy management, at a price below what they are worth — then hold for a long time and do very little.

What does Buffett look for in a company?

An understandable business, a durable moat protecting its profits, able and honest management, and a sensible purchase price. Sustained high return on equity without heavy debt is the number he keeps returning to.

Did Buffett always buy quality companies?

No. Trained by Benjamin Graham, he began by buying statistically cheap businesses regardless of quality. He later described that as a mistake and shifted towards paying a fair price for an excellent business.

Can an ordinary investor copy Buffett's strategy?

The principles are available to anyone and the discipline is the hard part. His actual returns are not a reasonable expectation — he invested at a scale and in an era that gave him advantages an individual does not have.