How do you invest like Warren Buffett?

Moat

'For Buffett, business results shouldn't be too fickle either,' Hermie continued. 'The soft drink giant Coca-Cola or the credit card provider American Express will not see their sales collapse overnight. They have a moat around their business model. At Coca-Cola, it is because of the brand name. At the electronics group Apple or American Express because of the ease of use, and the effort you have to put into switching to a competitor's product.'

'Although Buffett also finds a compromise in his portfolio. For example, Berkshire's train business (the railroad company BNSF, ed.) does need a lot of capital. But the enormous replacement value of all those trains and the big entry barrier for new players make that kind of business fit Berkshire's philosophy.'

Pure growth stocks, where the potential lies mainly in the future, which are loss-making for now and may still need a lot of capital, do not interest Buffett. 'Even start-ups do not qualify for a value investor,' Hermie emphasizes. 'Because you cannot yet apply the classic valuation standards to them to arrive at a fair value. That way you can exclude many biotech companies, for example.'

In his book, Kroeze lists the criteria that a company of excellence à la Buffett must meet. These are primarily quantitative requirements based on the bare numbers. The company must have a track record of years of revenue and profit growth that translates into a generous cash flow and a high return on equity. The balance sheet must be healthy. So companies with a lot of debt are out of the running.

In addition, there are quality requirements. The company should be easy to understand, although that is different for everyone. If you don't understand what the company does and how it makes a profit, stay away from it. Operations are best done globally and with a large customer base, so what happens in one country or with one customer need not be a fiasco. The company must have a competitive advantage, the potential to grow, strong pricing power, a leadership position in its market, and competent and honest management. And finally, it must be resilient to recessions or disruptions.

'You always have to look at the whole picture,' says Slegers. 'But if I have to pick out the two most important criteria for me: the 'moat' - the moat or competitive advantage - and the way the company deploys its capital. A strong, profitable company that reinvests its capital the right way can become a compound profit artist. But you can also misallocate that capital. For example, large acquisitions usually destroy value, while small, targeted acquisitions that provide a specific technology or qualified personnel often do create value.'

'For my own portfolio, I only select companies that have achieved an average return on capital of at least 15 percent over the past 10 years. The gross profit margin should preferably be above 40 percent,' Slegers clarifies. 'Of the 60,000 listed companies in the world, about 400 remain after an initial numerical screening. In a second selection based on exclusion, you arrive at about 250 companies. That's where you really have to go in depth and apply the quality criteria.'

An example of a company that meets all of Slegers' criteria is the American company Copart. 'That company buys cars from banks, insurers and leasing companies, but also from private individuals, and sells them again via the Internet. Every year it sells more than 3 million cars. On the European stock exchanges, the luxury group LVMH meets all the requirements. Belgian shares I do not have, but Luc Kroeze is a fan of Melexis, for example.'

Does the manager know all the necessary details of the company? Or is he or she rather selling high level management talk - i.e. air?
- Jens Verbrugge

Jens Verbrugge, a fund manager at Value Square, looks closely at the qualities of company leaders. 'When you start reading the annual reports and listening to the results calls, you already get a good indication of the quality of the management. Does the manager know all the important details of the company? Or is he or she rather selling high level management talk - i.e., air? Is management doing what it has been told, and is management saying what it is doing? That already says a lot.'

Patience

A crucial Buffett trait that many investors lack is patience. Shares of top-quality companies can be left for years, and let time do its work. 'A value investor should rarely react to the news of the day,' agrees Verbrugge. 'That doesn't mean you shouldn't follow evolutions. Ignoring trends can have pernicious long-term consequences. That's what makes investing so fascinating.'

Technological, sociological or fiscal changes can disrupt entire sectors. 'Artificial intelligence, for example, is making some moats less deep,' says Verbrugge. 'Especially the more creative sectors, where they write texts or edit audio and video, are at risk. For advertising agencies and artists, that can be a problem. In other sectors, AI is just creating opportunities. For years, Melexis has benefited from the trend toward more sensors and chips in cars, where AI is making inroads. D'Ieteren, through Carglass parent Belron, is getting a piece of the pie with increasingly sophisticated car windows and sensors that need to be recalibrated.'

'The biggest mistake you can make is misjudging the moat around the company,' Slegers also says. 'Disruption is the biggest danger. For companies like Coca-Cola or Nike, the risk of disruption is less. People will still be drinking a Coke or walking around on Nikes ten years from now. But who the champions will be in AI, I find it hard to estimate.'

No matter how well you try, realize that you will make mistakes. Not even Buffett turns everything he touches into gold. In 2011, he invested $11 billion in the IT giant IBM. Seven years later, he sold at a heavy loss. Berkshire also recently dumped all its shares of media group Paramount Global. "At a loss," Buffett acknowledged Saturday.

Don't make your portfolio too big, either. Buffett's listed portfolio of nearly $350 billion consists of barely 40 or so stocks. 'One of the most foolish things they teach you in college about investing is that you should diversify enormously. That's insane. If you find even three opportunities in a year, that's a lot,' Munger once said of that.

What you do need to do is keep a decent portion of cash. When bad times come and the stock market is trading cheap, you have to have ammunition to strike. Buffett's cash position has ballooned to a record $189 billion.

Ted & Tod

When should you sell? 'The best timing to get rid of a quality stock? Never!", Buffett said several times. Unless that stock's exceptional climb makes it a very large part of the portfolio. Buffett trimmed 13 percent of his stake in Apple this year. Buying into the IT giant in 2016 was one of the best moves of the past decade. Spurred by manager duo Ted & Tod - Ted Weschler and Todd Combs - Berkshire injected $40 billion into the iPhone maker. That stake was worth 175 billion at the end of last year, a fifth of all of Berkshire. That Buffett is skimming some of that mammoth sum should come as no surprise. He did the same in 2017, 2018 and 2019. Still, he remains an "absolute fan" of Apple.

Ted & Tod have managed a small portion of Berkshire since 2011-2012. Weschler got the job after putting the most on the table for the annual charity luncheon with Buffett two years in a row. Combs was hired after he wrote a letter to Munger with numerous arguments to meet with him.

Don't be disappointed if you do slightly worse than the grand master. Not even Ted & Tod, who lunched with Buffett every Monday for years, succeed. The Financial Times newspaper scrutinized the duo's decisions. They have less patience than their mentor. They sell faster and achieve leaner returns. In the first years after taking office, they still managed to beat the S&P500. But over the past decade, they have been scoring worse than the 12 percent for the S&P500, with returns averaging 7.8 percent. And less than the 10.2 percent Buffett achieved with his own investments.

So over the last decade, Berkshire has been doing slightly worse than the S&P500. A consequence of its enormous scale, Buffett said. 'Few companies are still able to move our pointer fundamentally. It's a structural advantage to have less money,' he said Saturday. 'I think I can make a 50 percent profit on $1 million. I know I can. I guarantee that!

The small investor is not bothered by such a mega-cap. 'The megacaps that could move Berkshire are expensive. Many small stocks are not. Because large, active investors and the press follow them less, mispricings are more common,' Hermie says.

'A small investor can more easily look for undiscovered gems,' argues Simon Renty, analyst for the stock market magazine The Investor. 'Even in Brussels, there are companies that are low valued, pay a high dividend and should still be able to achieve growth. Think of lingerie manufacturer Van de Velde or retail landlord Vastned Belgium. Look beyond national borders, too: how about French cheese maker Savencia? A family-run company with strong brands that is trading at barely 7 times earnings and well below book value.'

To invest like Buffett, you can, of course, buy Berkshire Hathaway shares. According to the information provider Morningstar, these are quoted about 5 percent below intrinsic value. Then you do miss the fun of playing the game yourself, which Buffett says keeps you so youthful.

Disclaimer

• Source: The Time
• Article: https://www.tijd.be/markten-live/analyse/na-woodstock-van-kapitalisme-in-omaha-hoe-beleg-je-als-warren-buffett/10544832.html‍
• Author: Serge Mampaey
• Photo: Reuters