Investors across the globe are tearing their hair out and panicking as markets reel from one crisis to the next. But legendary investor Warren Buffett, whose Berkshire Hathaway fund has, on average, beaten the S&P 500 by 14.65% over the past 30 years or so, is in the mood to buy. He hit the headlines recently due to an audacious offer to reinsure up to $800bn in municipal bonds for troubled monoline insurers. But he's been snapping up other, more accessible investments on the side.
Before we get to those, let's take a look at how Buffett operates. What's his success down to? Well, as the Evening Standard's Anthony Hilton says, it's a testament to the "long-run triumph of the boring". Buffett spurns "the new, the fashionable, the revolutionary and anything promising transformational change". He sat out the dotcom boom at the end of the 1990s, believing that new, fast-growing industries attract so many new entrants that picking the wheat from the chaff is more a matter of luck than judgement.
That may not sound like a heap of fun, but, according to the ANB Amro/RBS Global Investment Returns Yearbook, it works spectacularly well between 2000 and 2007 some high-profile UK sectors took a real hammering, with computer hardware down over 90%, software down 83%, fixed-line telecoms down 57%, and mobile telecoms down 46%. And the best performers? Tobacco, up an eye-watering 700%, mining, up 358% and personal and household goods up 420% and 315% respectively.
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So boring is beautiful but what's Buffett's technique for picking individual stocks? Over the years he has used several well-known rules of thumb, many of which can be traced back to Benjamin Graham, the father of value investing. Prime among these is a focus on absolute returns rather than where he is ranked in the wider market, which requires the discipline and confidence not to follow the crowd. He also focuses on picking long-term investments in businesses he understands, provided they are available for less than he thinks they are worth.
As the FT's John Authers notes, this means he is more than happy to invest in out-of-favour companies, provided they have a strong, "economic moat". This means having an established brand; a product where it is expensive for customers to switch to a rival brand; mass market appeal; and finally, the ability to sell for less than the competition.
Since many of these principles are well known and yet there is still only one Warren Buffett, how can other investors ever get near his stellar returns? The answer may be remarkably simple. A report entitled, "Imitation is the sincerest form of flattery", written by two professors, Gerald Martin of American University and John Puthenpurackal of the University of Nevada, suggests you should just copy him. Buffett, they argue, bucks the efficient-market hypothesis. This says, in short, that it is theoretically impossible for any individual investor consistently to outperform the market. They conclude that "Warren Buffett possesses investment skill", or what is sometimes labelled alpha'.
In other words, follow him and you are catching the tailcoat of an exceptional investor, rather than just mimicking what cynics would dismiss as a phenomenal gambler whose exceptional luck could run out at any time.
Of course, a copycat will never match, let alone beat, his performance, as Buffett will always enjoy first-mover advantage, assisted by the fact that publication of his bigger trades is often delayed. But their research still shows that someone who mimics Berkshire Hathaway's investment decisions, say with a one-month time delay, would earn on average a "positive abnormal return of 14.26% per annum". Just why is something of a mystery given that this strategy is open to anyone they conclude that the market underreacts to his deals, suggesting that, in spite of his formidable record, there are still plenty of Buffett cynics out there.
So, what's he been up to lately, apart from dabbling in municipal bonds? Two of his bigger recent acquisitions were an 8.6% stake in Kraft Foods (NYSE:KFT) at the end of 2007, making Berkshire Hathaway the biggest single shareholder, and 1.5 million shares in GlaxoSmithKline (LSE:GSK), suggesting Buffett can see beyond the recent profit warning and spies good long-term value in the healthcare sector he also owns sizeable stakes in Johnson and Johnson (NYSE:JNJ) and UnitedHealth Group (NYSE:UNH).
Then there's Canada. In a recent interview, Buffett admitted to buying and then selling big wads of Canadian dollars: "We made several hundred million dollars I wish we'd kept them." He believes that the Canadian currency has further to go, especially against the US dollar, and that adds an extra bit of spice to any Canadian investment returns.
Given that he thinks "the world will be using more oil 15 or 20 years from now", and therefore the Canadian tar sands "are huge", we like the Canadian Oil Sands Trust (TSX:COS.UN) and Suncor Energy (TSX:SU), the first company commercially to develop the sands back in 1967, and which is now hoping to double production by 2012.
Tim graduated with a history degree from Cambridge University in 1989 and, after a year of travelling, joined the financial services firm Ernst and Young in 1990, qualifying as a chartered accountant in 1994.
He then moved into financial markets training, designing and running a variety of courses at graduate level and beyond for a range of organisations including the Securities and Investment Institute and UBS. He joined MoneyWeek in 2007.
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