How to invest like Warren Buffett - UK shares he¿d like

7/28/2019 How to invest like Warren Buffett - UK shares hed like

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How to invest like Warren Buffett: His

philosophy and some of the UK shares hed

like the look of

By Ed Page Crof t

PUBLISHED: 08:41 GMT, 10 May 2013 | UPDATED: 14:47 GMT, 13 May 2013

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In the pantheon of investing legends Warren Buff ett stands tall as one of the most successful investors the

w orld has ever seen.

His accumulation of a $50 billion fortune has made him a symbol of all American capitalism w hile his f rugalityand commitment to charity have earned him admiration f rom all sides.

As the founder, chairman and CEO of US conglomerate Berkshire Hathaway, Buff ett has the resources at

hand to make multi-billion dollar market-moving investments. Yet, the principles behind his strategies have not

actually changed much in more than 60 years of investing.

In the fif th article in this series, Ed Page Crof t, mastermind behind guru investing strategy w ebsite

Stockopedia, looks at how Buffett has consistently delivered startling returns using an age-old formula and

some common sense rules.


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Coca-Cola: Penelope Cruz swigs from a bottle of coke, a brand Buffet had down as a

cash-generating 'inevitable'

Learning to invest the Warren Buffett way

Among the reams of books w ritten by investing legends espousing market beating strategies, tips, tricks and

complex mathematics, you w ont find any w ritten by Warren Buff ett.

Yet the 82-year old Sage of Omaha has earned a place in the heart of an adoring American public through the

w it, candour and humility displayed in the shareholder letters he has w ritten to Berkshire Hathaway

shareholders at the end of every financial year since 1977.

These letters are must-read for anybody w anting an insight into the mind of the w orld's greatest investor

w hile leaving a trail of w isdom for those w ho w ish to emulate him.

Warren Buff ett has been an astonishingly successf ul investor. Over 48 years his investment vehicle,

Berkshire Hathaw ay, has delivered a compounded annualised gain of 19.7 per cent to shareholders,

compared to an S&P 500 market index return of only 9.4 per cent.

Little wonder w hy its A shares now trade at a value of over $160,000 each w hile the companys

shareholder meeting has become something of a cult, attracting up to 40,000 sw ooning disciples annually.

While Buff ett has clearly proven his f inancial genius in accumulating such extraordinary w ealth, many now

agree that his pow ers are f irmly on the w ane. In fact, Buffett himself has admitted that 2013 could w ell be the

first time that Berkshire Hathaw ay w ill be beaten by the S&P 500 index over a f ive-year period. It seems that

the great man may have f inally become a victim of his success as he now struggles to f ind opportunities to

match his $50 billion cash hoard.

But there is hope for those w ith lesser f ortunes w ho w ish to emulate the great man. Buff ett himself once

said, 'It's a huge structural advantage not to have a lot of money. I think I could make you 50 per cent a year

on $1 million. No, I know I could. I guarantee that.'

So lets take a closer look at what shaped Buffetts secret sauce and how individual investors might be able


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to learn from it.

Schooled by the legends of investing - Graham and Fisher

As the son of a stockbroker, Buffetts early education was investment heavy and by 1950 he w as attending

Colombia Business School, where f inance analysts Benjamin Graham and David Dodd w ere tutors.

Graham and Dodd had written the hugely successful 'Security Analysis' in which they urged investors to

seek out shares that w ere incorrectly valued by the market. Buffett became an advocate of their principle ofbuying misunderstood shares priced at a huge discount to their true value.

Warren Buffettonce said:'The basic ideas of investing are to look at stocks as business, use the market's

fluctuations to your advantage, and seek a margin of safety. That's w hat Ben Graham taught us. A hundred

years f rom now they w ill still be the cornerstones of investing.'

WHAT NEXT FROM THE GURUS?

Many of us like the idea of buying great quality shares at cheap prices, but how do you do it?

Next time w e look at how US hedge fund manager Joel Greenblatts Magic Formula can show you w here to

look.

Within a few years Buffett was w orking for Grahams investment partnership before striking out on his own.

A series of deals in the early 1960s saw him take control of struggling New England based textile company

Berkshire Hathaw ay, a diff icult investment that w ould teach him a few lessons.

While he never departed from Ben Grahams principles of buying undervalued shares, he gradually learned

that there w as more to value investing than simply buying the cheap, distressed companies c lattering around

at the bottom of the stock markets bargain bucket.

While those so called 'cigar butt' stocks w ere regularly good for 'one last puff ' of pure prof it before they w ent

broke, Buffett soon learned (via Philip Fisher) that there w ere far greater profits to be had in paying up forhigh quality businesses that retained their prof its and stay in business - the kinds of companies that could

compound shareholder value year by year.

Berkshires distressed textile operations w ould ultimately be sold off at a loss, but provide an education

w orth a fortune.

As his philosophy developed tow ards '85 per cent Graham, 15 per cent Fisher' he gravitated tow ards

investing in companies that show ed robust competitive advantages, outstanding management leadership and

proven track records of grow th.

Some of the illustrative investments that fuelled Buffetts fortune include the kinds of companies that he called

inevitables cash generative brands such as Gillette, Coca Cola and American Express. In the case ofAmerican Express, Berkshire first bought its shares in the company in 1964, adding w eight to one of the

Sages famous observations: 'Our favourite holding period is forever.'

What Buffett looks for in a great investment...

Earning the 50 per cent annualised returns in micro-caps that the early Buff ett stalked requires a deep

understanding of corporate accounting and w illingness to fish in dangerous w aters. How ever, there are

safer w ays to hunt for the kinds of quality franchises that Buff ett favoured in his golden period during the

1980s and 1990s.


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These kinds of companies leave a trail of great financial results behind them that can be spotted as

consistently high levels of cash flow, long term positive profit trends, industry beating margins and most

importantly high returns on shareholder equity.

The return on equity reveals how good a company is at generating a prof it from the money invested in the

business. Buff ett realised that a high return on equity w as the real w ealth-generating engine in a business as

the profits retained by the company can be reinvested at this rate back into the business, funding future prof it

grow th in a virtuous circle.

The kinds of companies that can sustain a high return on equity often have a monopoly stranglehold on their

markets, selling products or services that must be bought repeatedly by their customers, w hile having a

freedom to set their own prices.

FREE FINANCE GUIDES

Undervalued Share Tips for 2013 (Guardian

Stockbrockers)

Where to invest your ISA in 2013

(MarketViews)

Dubai still reaches for the sky, brought to

you by HSBC (HSBC)

How to invest for income - Free 16 page

magazine (Aberdeen Asset Managers)

How Equity Income Funds can safeguard

your income from inflation (BNY Mellon)

The best companies of ten have either very strong barriers to entry, brands, scale advantages or netw ork

eff ects that help sustain their great f inancials - these attributes help build the durability of a companyscompetitive advantage, or economic moat.

Unfortunately, the types of stocks that have this prof ile often can become darlings of the stock market.

Buying great companies at high prices can lead to very average results, so Buffett learnt to buy them during

bad new s events w here the market puts them on sale. His famous trade to buy w arrants in Goldman Sachs

during the financial crisis is a case in point.

Buffett has never been one to speculate in startups, exploration stocks, blue sky projects or 'commodity' type

businesses at the mercy of the market.

These are the kinds of 'story ' companies that private investors are so of ten suckers for on their w ay to the

poor house. Buffett w as much happier to 'w ait for the fat pitch', for an investment that to fall w ithin his 'circleof competence'.

Hunting for Buffett-esque stocks in UK and European

markets

Buffetts advice w as to start w ith the As and get to know all the great companies in the market w hile w aiting

for the right price. He has been a huge advocate of reading 500 pages per day and searching through stock

market directories looking for companies w ith promising financial prof iles that are on sale.


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These days one can scan the stock market much more quickly than w hen Buffett got started by using a

pow erful stock screener loaded w ith the fundamentals and price histories of the stocks in the market.

At Stockopedia w e currently track three different Warren Buffett inspired stock screening models based on

hunting for stocks w ith the kind of f inancial profile we've been discussing. Each of these strategies has

outperformed the FTSE 100 to varying degrees since 2011.

Among them, the Buffett-esque Sustainable Grow th Screen has produced a 21 per cent annualised return

since 2011, and currently counts some famous brands and services amongst currently qualifying candidate

stocks including Burberry, biotech company Abcam, Dominos Pizza and engineering group Kentz.

About Stockopedia and the guru investing strategies

Our investing guru series is being w ritten by Ed Page Crof t and the team at Stockopedia. You can read This is

Money's review of Stockopedia by Simon Lambert and more about the s ite at the links below.

But first a word of warning: The investing guru series seeks to explain the theories behind the great

investors' success and highlight some shares that fit their methods.

We highlight the modelled returns their strategies could achieve based on actual stock market performance,

how ever, never forget that past performance is not indicative of future returns.It is also vital to consider that these and all other investment articles on This is Money are simply ideas and if

you are thinking of investing they should only ever be a starting point for your ow n in-depth research before

making a decision.

Track the performance of all Stockopedia's GuruModel strategies

Follow @stockopedia or@edcrofton Tw itter

Stockopedia f ree 2 w eek trial and 50 discount for This is Money readers

* No fee for publication is involved between This is Money and Stockopedia for this column.

Comments (10)

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I lov e this line in the article... "Buf f ett learnt to buy them during bad news ev ents where the market puts them on sale" -

y eah, because y ou don't want to be sued f or imply ing insider trading or market manipulation, which has been rife in the US. A

f ew wire taps here and there does tend to stop people promising 50% return these day s.

- JJ , B-Stoke, United Kingdom, 14/5/2013 11:34

Click to rate Rating (0)

Report abuse

why is it that Dr graham and Dodds didn't make 50 billion as ther e student did Buf f it bonnet88

- bonnet88 , chingford, Albania, 11/5/2013 20:26

Click to rate Rating 7

Report abuse


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Greka drilling - buy.

- Tony Soprano , Elgin, 11/5/2013 14:49


Report abuse

Buff et himself say s the av erage person should buy index f unds on a regular basis as they will not know enough to know what

stocks to buy or when to buy them.

- Django , London, 11/5/2013 03:33


Report abuse

Mr Buff ett is a legend and spouts many wise public words. But he never giv es away his secret sauce. All that stuf f about

"invest f orever" is just the obv ious bit to detract questions. His real secret sauce is kept priv ate. He knows that if he told y ou

his genuine investment secrets , ev eryone would copy them in a f lash, and his inv esting edge and aura would be lost f orever.

By all means, listen to Buff ett's excellent public adv ice, but be under no illusion that he is giv ing us the full picture.

- Connect The Dotz , Woburn_England, 11/5/2013 02:50


Report abuse

Buff et has enough wealth to buy companies outright. The only option small investors hav e is to buy property or buy Intel

stock which y ields over 4% and your likely to get y our money back or more.

- anon , leeds, 11/5/2013 00:44


Report abuse

Its interesting that a lot of wanabees try to emulate Buf f et with mathematical formula when is'nt it obv ious Buf f et shoots

f rom the hip with gut f eelings. It s seems so easy to him.

- Greg Malaysia , Kedah, 10/5/2013 16:57


Report abuse

Yeah Agree, this article doesn't hav e a money shot at all. Please rename it as "Come buy our products to f ind out what

Warren Buf f ett might invest in."

- Robert , Oxf ord, United Kingdom, 10/5/2013 13:26


Report abuse

Good on y ou Mr Buff ett a most unpretentious man still liv ing modestly despite his wealth .... his share holder meetings are

good old f ashioned af f airs ( with Mr Buf f ett and his second in charge Mr Charlie Munger acting as chefs cooking up the barbie

) Next time any DMV readers squirt some Heinz tomato sauce on y our food you will be adding to the Berkshire Hatherway

cof f ers as Heinz was the latest acquisition in a very diversif ied portf olio


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- Drug Free , Sy dney, Australia, 10/5/2013 11:49


Report abuse

So this is sort of like an adv ert but without the word 'Advert' at the start?. ... ... ... ... ... during the gold rush it was the people

who sold the shov els who became the Millionaires.

- TB , Norf olk, United Kingdom, 10/5/2013 11:32


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Undervalued Share Tips for 2013 (Guardian

Stockbrockers)

Where to invest your ISA in 2013

(MarketViews)

Dubai still reaches for the sky, brought to

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How to invest for income - Free 16 page

magazine (Aberdeen Asset Managers)

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How to invest like Warren Buffett - UK shares he¿d like