The how to invest like Warren Buffett article is a stalwart of investment writing.
There will have been hundreds of thousands if not millions of words written on how to emulate the world’s most famous investor over the years – and This is Money has certainly contributed a few of them.
Yet, the concept behind these articles is flawed. Because to invest like the man dubbed the Sage of Omaha has done for the past few decades requires you to be Warren Buffett.
Buffett ceased being an investor many years ago and became a multi-billionaire businessman with the ability to strike investment deals that none of us could hope to do.
Investing like Buffett is a commonly followed philosophy but the world’s most famous investor can strike the kind of deal that you couldn’t for your Isa
Companies want Buffett on board and will give him a better deal in backing them than you or I could get by buying their stock market-listed shares. Meanwhile, founders and family owners will sell to Buffett when they wouldn’t to others.
In the financial crisis era, Buffett famously struck rescue deals with three of the world’s most powerful companies, Goldman Sachs, General Electric and Bank of America that very much favoured his Berkshire Hathaway investment vehicle.
In return for a Buffett bailout, he got preferred stock and warrants that gave him the right to swap to ordinary shares in the future and make a huge profit.
Good luck on striking a similar deal for your Isa.
So, why do we still write about investing like Buffett and companies that might pass his investment test?
Largely, because despite a gradual transformation from investor, to businessman, to possibly the world’s most powerful dealmaker, Buffett has stuck fairly true to some guiding principles, which with a bit of honing through the years have delivered a solid guide to identifying good and robust companies.
Buffett outlines his philosophy as buying companies that he would be happy to hold forever, because they have strong finances, a robust business model, a so-called ‘moat’ – which means their business cannot be easily replicated – and a simplicity that means you can understand what they do.
Set aside that some of this doesn’t seem to really chime with striking sweet deals with stricken financial firms, and you can use it try to identify shares that may not always be the best performers but should deliver solid compound growth over time.
To that end, an interesting stock screen from Simon McGarry, senior equity analyst at Canaccord Genuity Wealth, came my way this week with 14 UK-listed companies that he thinks pass the test of Would Buffett Invest?
He looked for companies that had some key Buffett criteria: sound management with consistently high cash flows, demonstrable earnings capacity, prudent balance sheets, a fair price, and simplicity.
Some of these metrics involved running the numbers, others such as the ‘simple business’ test are a more arbitrary concept. I will publish the criteria in more detail and how the shares scored in the online version of this column.
The screen threw up some names many will recognise and quite a few that most won’t, belying the myth that Buffett-style investing is all about big brands the person on the street knows.
They ranged from FTSE 100 giant RELX (previously known as Reed Elsevier), to investor darling Ashtead, packaging firm DS Smith, IT specialist Computacenter and gifts and greeting cards firm IG Design.
|Company||Market cap||Price earnings ratio||EPS growth||Dividend yield||Dividend cover||Free cash flow yield|
|Hill & Smith Holding||993||17.2||-2.60%||2.20%||2.6||4.80%|
|Source: Canaccord Genuity Wealth (June 2020): Screen used 12 month forward ratios|
If you do like to invest in individual company shares, screens such as this provide an interesting jumping off point.
If you want to find some, an internet search can be your friend but be very wary of who you trust out there and consider whether there is an ulterior motive. Watch out for the bulletin boards where shares are ramped and any boiler room operations pushing dodgy operations.
Reputable investment firms regularly publish screens and we will occasionally run articles on them, as do This is Money’s investing press rivals. A good paid-for option to consider is share data specialist Stockopedia, with its Guru screens.
Alternatively, if it’s Buffett that you want to invest like and you prefer not to dabble in individual shares, you can look for a fund or investment trust manager of that mould.
The two most famous UK managers of this ilk are Terry Smith, of Fundsmith, and Nick Train, of Finsbury Growth and Income trust and the Lindsell Train funds, along with his partner Michael Lindsell.
There is even a Buffettology fund (disclosure, I invest in this) run by Keith Ashworth-Lord, a veteran British investor, who follows the style of investing that is championed by Buffett and holds 25 to 30 UK companies of all sizes that he feels fits the bill.
Meanwhile, broker the Share Centre highlighted last year another two funds that it feels suit the Buffett principals, Artemis Income and Liontrust Special Situations.
Whether a portfolio of the 14 shares the Buffett screen turned up, or any of the funds mentioned above, will turn out to be a wise investment is something only time will tell.
But, as ever, I would urge anyone considering buying them to carefully do your own research, because you can guarantee that’s what Warren Buffett would do before he invested.
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