How do you invest as Warren Buffett?

Moat

For Buffett, the operating results shouldn't be too fickle either,” Hermie continues. “The soft drink giant Coca-Cola or credit card provider American Express won't see their turnover collapse overnight. They have a moat around their business model. At Coca-Cola, this is because of the brand name. At the Apple or American Express electronics group because of the ease of use and the efforts you have to make to switch to a competitor's product.”

“Although Buffett also finds a compromise in his portfolio. For example, Berkshire's train operations have (the railway company BNSF, ed.) does require a lot of capital. But the enormous replacement value of all those trains and the major entry barrier for new players mean that these types of companies fit into Berkshire's philosophy. '

Pure growth stocks, where the potential lies mainly in the future, are loss-making for the time being and may still need a lot of capital, are not interested in Buffett. “Start-ups are also not eligible for a value investor,” emphasizes Hermie. “Because you can't yet apply the classic valuation measures to achieve a fair value. That way, for example, you can exclude many biotech companies. '

In his book, Kroeze lists the criteria that a top-quality company à la Buffett must meet. First of all, these are quantitative requirements based on the bare numbers. The company must have a track record of years of sales and profit growth, which is translated into a large cash flow and a high return on equity. The balance must be healthy. Companies with a lot of debt are therefore falling by the wayside.

In addition, there are quality requirements. The company must be easy to understand, although it's different for everyone. If you don't understand what the company does and how it makes a profit, stay away from it. The activities are best done globally and with a large customer base, so that events in one country or with one customer do not have to be a failure. 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 resistant to recessions or disruptions.

“You always have to look at the whole picture,” says Slegers. “But if I do have to choose the two most important criteria for me: the 'moat' - the moat or the competitive advantage - and how the company uses its capital. A strong, profitable company that reinvests its capital properly can become a composite profit artist. But you can also misuse that capital. For example, large acquisitions usually destroy value, while small, targeted acquisitions that provide specific technology or qualified staff often create value.”

“For my own portfolio, I only select companies that have achieved an average return of at least 15 percent on their capital over the past ten years. The gross profit margin should be at least above 40 percent,” explains Slegers. “Of the 60,000 listed companies in the world, around 400 remain after a first grade screening. A second selection based on exclusion brings you to around 250 companies. Then you really have to go into depth and apply the quality criteria to that. '

An example of a company that meets all 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 involves more than 3 million cars. At the European stock exchanges, the luxury group LVMH meets all requirements. I don't have Belgian stocks, but Luc Kroeze is a fan of Melexis, for example. '

Does the manager know all the necessary details about the company? Or is he or she more likely to sell high-level management talk - air -?
- Jens Verbrugge

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

Patience

One crucial feature of Buffett that many investors lack is patience. You can miss stocks of top-quality companies for years and let time do its work. “A value investor rarely has to respond to the news of the day,” Verbrugge agrees. “That doesn't mean you shouldn't follow developments. Ignoring trends can have long-term negative consequences. That's what makes investing so exciting. '

Technological, sociological or fiscal changes can disrupt entire sectors. “Artificial intelligence, for example, makes some moats less deep,” says Verbrugge. “The more creative sectors, where they write texts or edit audio and video, are particularly at risk. This can be a problem for advertising agencies and artists. In other sectors, AI does not create opportunities. For years, Melexis has benefited from the trend towards more sensors and chips in cars, where AI is making its appearance. Through Carglass mother Belron, D'Ieteren is getting a piece of the increasingly advanced car windows and sensors that need to be recalibrated. '

“The biggest mistake you can make is misjudging the moat around the company,” says Slegers. “Disruption is the biggest threat. For companies like Coca-Cola or Nike, the risk of disruption is less significant. In ten years, people will still be drinking a Coke or walking around on Nikes. But I have a hard time estimating who the champions will be in AI. '

No matter how hard you try, be aware that you will make mistakes. Even Buffett doesn't turn everything he touches into gold. In 2011, he invested 11 billion dollars in the IT giant IBM. Seven years later, he sold at a heavy loss. Berkshire also just dumped all its shares in the Paramount Global media group. “At a loss,” Buffett acknowledged on Saturday.

Don't make your portfolio too big either. Buffett's listed portfolio of nearly 350 billion dollars consists of barely 40 stocks. “One of the most foolish things they teach you about investing at university is that you have to diversify enormously. That's crazy. If you already find three opportunities in a year, that's a lot,” Munger once said.

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

Ted & Tod

When do you need to sell? “The best timing to get rid of a quality stock? Never! ' , Buffett said several times. Unless, due to its exceptional climb, that stock will determine a very large part of the portfolio. Buffett trimmed 13 percent of his stake in Apple this year. Joining the IT giant in 2016 was one of the best moves of the past decade. Under the impetus of the management duo Ted & Tod - Ted Weschler and Todd Combs - Berkshire injected 40 billion dollars into the iPhone maker. At the end of last year, that stake was worth 175 billion, a fifth of the whole of Berkshire. It should come as no surprise that Buffett skims some of that mammoth sum. He also did it in 2017, 2018, and 2019, yet he remains an “absolute fan” of Apple.

Ted & Tod have managed a small part of Berkshire since 2011-2012. Weschler got the job after laying out the most for the annual charity lunch with Buffett two years in a row. Combs was hired after writing a letter to Munger with numerous arguments for meeting him.

Don't be disappointed if you do a little worse than the grandmaster. Even Ted & Tod, who had lunch with Buffett every Monday for years, fail. The Financial Times newspaper reviewed the duo's decisions. They have less patience than their mentor. They sell faster and get leaner returns. In the first few years after taking office, they still managed to beat the S&P500. But over the past ten years, with an average return of 7.8 percent, they have scored worse than the 12 percent for the S&P500. And less than the 10.2 percent that Buffett achieved with his own investments.

So over the past ten years, Berkshire has performed slightly worse than the S&P500. A result of the enormous scale, says Buffett. “Few companies are still able to fundamentally move our wiser. It's a structural advantage to have less money,” he said on Saturday. “I think I can make a 50 percent profit on 1 million dollars. I know I can do that. I guarantee that! '

The small investor is not bothered by such a mega size. “The megacaps that could make Berkshire move are expensive. Not many small stocks. Because large, active investors and the press follow them less, there are more mispricings to be found,” says Hermie.

“It's easier for small investors to look for undiscovered gems,” says Simon Renty, analyst at the stock exchange magazine De Belegger. “In Brussels, too, there are companies that are low-valued, pay a high dividend and still need to be able to achieve growth. Think of the lingerie manufacturer Van de Velde or the retail rental company Vastned Belgium. Also look across national borders: what do you think of the French cheese maker Savencia? A family-run company with strong brands that is at barely 7 times profit and well below book value. '

To invest as a Buffett, you can of course also buy Berkshire Hathaway shares. According to the information provider Morningstar, they are around 5 percent below the intrinsic value. Then you're missing out on the fun of playing the game yourself, which Buffett says keeps so youthful.

Disclaimer

• Source: De Tijd
• 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