US Edition
Warren Buffett is perhaps the most celebrated investor of all time – but he may not have been able to build his fortune without the help of his right-hand man, Charlie Munger.
Mr Munger, who also hailed from Omaha and was the vice chair of their investment company Berkshire Hathaway, died on Tuesday aged 99.
Mr Buffett said in a statement that Berkshire Hathaway “could not have been built to its present status without Charlie’s inspiration, wisdom and participation”.
Thousands of savers have relied on this wisdom to help guide their own investment decisions, in the hope that imitating the style – or even the exact portfolios – of the world’s best investors can help their cash grow. Here, we break down how you can invest like the best and bag Berkshire Hathaway-style returns.
Warren Buffett
Funds: Berkshire Hathaway, SDL UK Buffettology, Fundsmith Equity
Shares: Berkshire Hathaway, Apple, Disney, Microsoft
Warren Buffett is probably the world’s most famous investor. The so-called “Sage of Omaha” and his partner Mr Munger have delivered returns of almost 200pc in the past 10 years alone. Their success is based on a straightforward, no-nonsense approach: invest in good businesses, with trustworthy managers, at fair prices, and you should succeed in the long-term.
Their company, Berkshire Hathaway, regularly updates its investors about what its own portfolio looks like. So, if you would like to incorporate Mr Buffett and Mr Munger’s investment style into your Isa, you could either buy shares in Berkshire Hathaway itself, or buy shares in the companies it invests in.
Big, quality businesses such as Apple, Disney and Diageo feature in Mr Buffett’s portfolio. He has also bets big on oil – his company is the biggest shareholder in both Chevron and Occidental Petroleum, among the largest oil producers in the world.
While Mr Buffett started out with a hard focus on “value” investing – buying shares that appear to be below their intrinsic value – he has credited Mr Munger with widening his approach.
“Charlie shoved me in the direction of not just buying bargains, as Ben Graham had taught me,” he told Forbes magazine in 1996. “This was the real impact he had on me. It took a powerful force to move me on from Graham’s limiting view. It was the power of Charlie’s mind. He expanded my horizons.”
Laith Khalaf, of the broker AJ Bell, suggested Fundsmith Equity as an alternative pick for investors who preferred to buy funds based in Britain. The £25bn fund is run by Terry Smith, one of the nation’s most widely followed investors.
“The Fundsmith Equity approach is similar to Buffett’s, boasting an owner’s manual and an annual shareholder letter, like Berkshire Hathaway, and following the strategy of buying good companies, not overpaying, then doing nothing,” he said.
The £692m UK Buffettology fund is another popular option. It is managed by Keith Ashworth-Lord, an investor who after agreeing a fee with Mr Buffett’s former daughter-in-law, Mary Buffett, is licensed to use her Buffettology brand.
So far, the Buffettology philosophy has served investors well: in the past 10 years it has returned 137pc by backing high quality British companies, compared with a 73pc return in the FTSE 100.
Benjamin Graham
Funds: Jupiter UK Special Situations, iShares Core Global Aggregate Bond ETF
Shares: BP, Shell
Benjamin Graham is hailed as the father of “value investing”, best known for his iconic book “The Intelligent Investor” and as a teacher of Warren Buffett.
Value investors seek out shares that are trading below their intrinsic value. This is determined through a range of “valuation” processes, such as calculating the “price to earnings” ratio. This compares a company’s share price to its earnings – the lower the multiple, the cheaper the stock.
A P/E ratio is useful for a quick valuation, but remember that it does not paint a comprehensive picture. It ignores other aspects of a company, such as its debt, its assets and cash flow, to name a few.
Value investing has been out of favour for most of the last decade, but has stepped back into the limelight recently thanks to a seachange in the economic environment.
Mr Khalaf recommended the Jupiter UK Special Situations fund, run by Ben Whitmore who he described as a “disciplined and rigorous” value investor. The fund invests in companies such as BP, Shell and the defence company BAE Systems. It has returned 102pc over the past ten years, also beating the FTSE 100.
John Templeton
Funds: Schroder Global Recovery
Sir John Templeton was an American-British value investor, famed for his contrarian approach. He believed the best way to make money was to buy at the point when everyone else was pessimistic. One of his most famous sayings was: “bull markets are born on pessimism, grow on scepticism, mature on optimism and die on euphoria”.
The best way to adopt Sir John’s approach is to look for a fund manager approaching the global stock market with a value strategy. The Schroder Global Recovery fund is a good fit, as it looks for companies that are out of favour but which the managers think have potential for a sharp recovery.
Any savers taking a Lynch-style approach should be prepared for a lot of volatility. If you are looking for steady returns then it may be better to keep this style limited to a smaller part of your portfolio.
Peter Lynch
Funds: Artemis SmartGARP Global Equity, Tellworth UK Smaller Companies
Growth investing was a very lucrative strategy over the 2010s. This is when stock pickers back companies which are expected to grow their revenues fast, sometimes even when they are still far off from making a profit.
The trouble with this strategy is that often these stocks come at very steep valuations and if something goes wrong the share price can tank quickly. Peter Lynch’s idea was to target “growth at a reasonable price”, or GARP.
Mr Khalaf said this blended both the value and growth investment styles. “He popularised the somewhat flawed notion of a PEG ratio – which divides a PE ratio by the annual growth expected from a company, and suggested that a fairly priced company has a PEG ratio of 1,” he said.
Best known for his book “One Up on Wall Street”, Mr Lynch has long advocated that regular savers can bag big gains on the stock market by spending time studying a company’s financial statements.
Mr Khalaf added: “Lynch’s book was designed to help everyday investors beat Wall Street money managers by picking stocks themselves, so it feels slightly incongruous to suggest funds which replicate his approach. But then again, some of his advice borders on the dangerous, for instance holding between three and ten stocks seems woefully under-diversified, something a fund can easily mitigate.
“Those in search of ten baggers might consider a smaller companies fund, as the minnows of the stock market are most likely to have scope to appreciate so tremendously in price. The Tellworth UK Smaller Companies fund combines growth and value characteristics in a way Lynch might well have approved of. For those who are interested in GARP, the Artemis SmartGARP Global Equity fund might be worth investigating.”
Jack Bogle
Funds: Vanguard LifeStrategy funds, iShares trackers
Finally, but arguably most important for DIY investors, Jack Bogle, who revolutionised passive investing. He founded Vanguard, which popularised low-tracker index funds and is still one of the largest investment companies in the world.
Mr Bogle’s philosophy was that regular savers should not have to pay through the nose to get access to the stock markets – and in fact, professional investors rarely ever beat the rest of the market, so they would probably be better off not paying for them anyway.
Even Mr Buffett himself wrote in a letter to his shareholders in the 1990s that a low-cost fund was the most sensible choice for most savers. “By periodically investing in an index fund, for example, the know-nothing investor can actually out-perform most investment professionals,” he wrote.
Vanguard offers index trackers as well as pre-packaged “LifeStrategy” funds, which invest in a mix of global stocks and bonds, depending on your appetite for risk, at a low fee. Over the past three years, the Vanguard LifeStrategy 100pc Equity fund has delivered returns of 42pc, compared with an average 37pc return from global fund managers.
BlackRock, a rival asset management firm, also offers investors a range of “iShares” tracker funds at a similarly low cost.