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Warren Buffett wrote a very short letter to Berkshire Hathaway shareholders this year, it was short because it was a distilled description of key things all us value investors need to keep in mind.
First of all, we are not market-watchers, market-traders or stock-pickers, flitting from share to share because we think the stock market is going to do this or that. No, we are business-pickers. We analyse, in detail, real, living, breathing businesses:
“Our goal…is to make meaningful investments in businesses with both long-lasting favorable economic characteristics and trustworthy managers. Please note particularly that we own publicly-traded stocks based on our expectations about their long-term business performance, not because we view them as vehicles for adroit purchases and sales. That point is crucial: Charlie and I are not stock-pickers; we are business-pickers.” (Warren Buffett 2023)
There you have it. To be a successful value investor you must learn how to:
- Assess the economic characteristics of businesses. Take an interest in strategic positioning of firms. Is there a characteristic that allows superior pricing power allowing high returns on capital employed? Take an interest in the functioning of whole industries. Are there characteristics, e.g. few competitors, power over suppliers, that permit the industry as a whole top produce high returns on capital?
- Identify trustworthy managers. Trustworthiness comes in two forms. First, competence. Second, shareholder orientation – acting for their best interests. To establish in your mind whether the managers pass these two test you will need to do some work – often a lot of work.
I went from being a tenured professor and writer to being a full-time analyst of companies nine and half years ago. I gave up my previous comfortable position because I knew that it would take tens of hours every week to do the job properly.
Now, I use the knowledge base I’ve built up to invest other people’s money in a Managed Portfolio Service at Henry Spain – people who have lives to get on with and simply cannot spend all day thinking about company analysis. They get to invest in the same shares (or rather I invest it for them) as me. If you are interested in joining us contact Jackie.Tran@henryspain.co.uk.
It is because I’m investing through Henry Spain – and still investing – that I haven’t been able to comment so much recently on good investments I’ve found here at ADVFN.
I’m sorry about that, but I hope to make up for it with my analysis of NatWest which will be in a series of Newsletters here. NatWest is sufficient large that even if a large number of my followers on ADVFN buy its shares that won’t disrupt our plans at Henry Spain.
The next newsletter will discuss Buffett’s tendency to make mistakes – errors are an inevitability for an investor – but nevertheless produce a satisfactory return overall.
