How I'd Invest My First $1,000 in Stocks (and Why Buffett Would Approve)

If 2025 is the year you're first getting into the market, you've picked a wild one to get started. A small number of massive technology companies have soared thanks to their involvement with artificial intelligence (AI), dragging the overall market higher with them.

This kind of mania isn't the norm though. And it will unwind sooner or later, deflating most portfolio values when it does.

Not every stock is going to take you on a roller-coaster ride, however, just as not every stock is overvalued. Indeed, with the exception of the small number of AI-related stocks that have been catapulted higher of late, most stocks remain reasonably valued.

If I were just getting started today with $1,000, here's a closer look at the three stocks I'd start with, and why I think Warren Buffett -- who generally avoids or ignores short-term volatility -- would approve of each one.

Image source: Motley Fool.

1. Coca-Cola

Coca-Cola (NYSE: KO) is of course one of the world's most recognized brand names, and the most recognized brand name in the non-alcoholic beverage business. It's not just its namesake cola, though. The Coca-Cola Company also owns Gold Peak tea, Minute Maid juices, Powerade sports drink, Dasani water, and plenty more. It's got something for every consumer's ever-changing preferences.

Now, if you've been keeping tabs on the organization lately then you likely know Coca-Cola's performance during the past couple of quarters has been less than thrilling despite its diverse product lineup. Its recently reported Q3 results indicated a reversal from Q2's dip in the amount of total product sold, but only a slight one. Sales and earnings also topped expectations thanks to top-line growth of 5%, yet Coca-Cola's management also made a point of saying that overall demand for its packaged drinks remains relatively soft; smaller, more affordable package sizes are in the works.

Just don't read too much into this warning, or for that matter, the overarching consumerism headwind. This is all cyclical stuff that the company's been through and survived before. This time around isn't apt to be any different. Coca-Cola will be able to regroup just fine and thrive again once the economic backdrop improves.

Warren Buffett encourages investors to only buy into quality businesses they truly understand. Coca-Cola ticks off both boxes. It's a simple business to assess, and as a long-lived market leader, there's no denying it's a quality company.

There's far more evidence than this that Buffett would approve of a newcomer owning a stake in The Coca-Cola Company, though. That is, the Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) company he's led for decades actually owns a sizable stake in the beverage giant. It's Berkshire's fourth-biggest individual stock holding, in fact, currently worth around $28 billion.

McDonald's

Berkshire Hathaway doesn't hold a stake in fast-food powerhouse McDonald's (NYSE: MCD), but it's not as if Buffett wouldn't, or couldn't. Like Coca-Cola, it offers much of what he likes in a prospective investment.

One of those attributes is a reliable, growing dividend. Although its forward-looking dividend yield of 2.4% is just average, it's based on a dividend that's now been raised every year for the past 49 years, which has allowed McDonald's stock to perform like a growth stock when reinvesting these dividend payments. There's no end to the streak in sight either.

Of course, the fast-food restaurant chain's raw dominance of the industry's landscape speaks for itself. There's a reason the company's been able to establish an industry-leading 44,113 stores all over the world. That is, like Coca-Cola, it's gotten very, very good at lifestyle branding. And like Coca-Cola, this company's struggled to keep cash-crimped consumers stopping by for its burgers. Also like Coca-Cola, however, this headwind will pass for McDonald's.

But that's not the chief reason you or Buffett might want to consider following the stock's lethargic performance since late last year, and really, since the middle of 2023. The overarching reason this company translates into such a fantastic investment is the business model itself.

See, contrary to a common assumption, McDonald's isn't actually in the fast-food business. It's mostly a real estate company that just happens to lease 95% of its stores to fast-food franchisees, collecting ever-rising market-rate rent from them -- reliable cash flow that Buffett loves, particularly from Berkshire's non-publicly traded holdings like Fruit of the Loom, Pilot Travel Centers, Duracell, and Geico insurance, just to name a few. The bulk of the risk of being in the business is ultimately shouldered by the franchisees themselves.

Again, Buffett's a big fan of businesses that are easy to understand, as well as businesses that lead their respective markets for obvious reasons. As was the case with Coca-Cola, McDonald's does both.

SPDR S&P 500 ETF Trust

Finally, if you're an investor who's just getting started and only have $1,000 to start with, consider allocating at least a good-sized chunk of this sum to an investment in the SPDR S&P 500 ETF Trust (NYSEMKT: SPY).

It's not a stock. Rather, it's a basket of stocks that are bought and sold as a whole. In this case the basket holds the same 500 tickers that make up the S&P 500 (SNPINDEX: ^GSPC) index, in the same proportions. This is about as close to investing in the overall market as you're going to be able to get.

The thing is, for most people -- newbies and veterans alike -- it's a smart choice for at least a sizable portion of your portfolio.

Most individual investors don't beat the market. Don't be too discouraged, though. Most professional stock pickers don't beat the market either. Data regularly updated by Standard & Poor's indicates that most mutual funds available to investors in the United States consistently underperform their benchmark indexes like the aforementioned S&P 500. And hedge funds fare no better, despite being managed by what are supposed to be the best and brightest stars. It's just hard to beat the market's performance, and even harder to do so consistently.

If you want to play the odds, so to speak, your best bet isn't trying to beat the market, but rather merely matching its long-term average annual gain of around 10%.

Buffett's suggested the same, and more than once. The most recent instance came in 2020, when at Berkshire Hathaway's annual meeting of shareholders he explained: "In my view, for most people, the best thing to do is to own the S&P 500 index fund. People will try and sell you other things because there's more money in it for them if they do."

Enough said. Even if it's not the most exciting of holdings, it's a great foundational position to build on with individual stocks as new money is added to your account.

James Brumley has positions in Coca-Cola. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool has a disclosure policy.