“It’s not a way to get real rich, but it’s a way to stay real rich,” Warren Buffett said in 2020 at the annual general meeting of his conglomerate Berkshire Hathaway. Buffett was talking about the utility and energy sector. In particular, he was referring to Berkshire’s division, Berkshire Hathaway Energy (BHE). 

Berkshire entered the energy supply and distribution business in 1999 when it bought a controlling stake in MidAmerican Energy Company for $2billion. The group expanded rapidly, buying stakes in other operators in the US, Canada, the UK and Australia. Today, BHE operates across 28 US states, transports 15% of America’s natural gas and serves more than 13 million customers. The $2billion initial investment has grown into a giant with $138billion of assets. 

However, ferocious headwinds have started building against the utility giant in recent years. These trends, which seem to have forced Buffett to reconsider his stance as an advocate of the industry, aren’t limited to North America, and BHE isn’t the only company struggling. Worldwide, the entire utility sector is grappling with what can only be described as a once-in-a-generation period of change that threatens to upend the once-reliable industry.

Future of the energy sector

In Warren Buffett’s 2023 letter to the investors of Berkshire Hathaway, the billionaire cast doubt over the future of the group’s energy business, which he had praised only a few years previously. “Berkshire can sustain financial surprises, but we will not knowingly throw good money after bad,” he noted in his annual letter to shareholders in February, warning of the “spectre of zero-profitability or even bankruptcy” across the industry. 

The root cause of this change of heart is climate change. PacifiCorp, the largest electric utility owned by Berkshire, has been found liable for a series of deadly wildfires in 2020. The company has been blamed for failing to shut off some of its power lines, which ignited vegetation that had been dried to a crisp by the hot weather. The scale of the potential liability isn’t yet clear, but analysts have suggested the bill could be as high as $45bn. 

At the same time, BHE is spending tens of billions of dollars rebuilding its electricity network to cope with the surge in demand for green power and associated transition systems. Meanwhile, in 2019, Pacific Gas & Electric, California’s largest utility, filed for Chapter 11 bankruptcy protection after accumulating an estimated $30bn in liability for fires started by its poorly maintained equipment. 

These twin issues perfectly illustrate the difficulties facing the global utility sector today. On the one hand, climate change is upending how companies have been doing business for years. And on the other, these companies are having to rebuild their networks to cope with the green transition. That means more electricity (copper wire, in other words), less coal, more solar and fewer big, horizon-dominating power plants.

The biggest problem facing the sector is that the new world order is going to look very different to the old one. Large power plants are becoming a thing of the past, to be replaced with tens of thousands of smaller solar or wind farms. These units are cheaper and easier to build, but they require the grid to be rewired. 

The current electricity grid in most nations is based on the model of a few big power plants and their associated equipment. So there tend to be a few well-connected spots around each country. That’s no longer relevant. Where there was one plant, there are now ten dotted around each region, and each one needs new connections. The cost of this change will be astronomical. The UK’s National Grid has released a “£58bn plan” to rewire Great Britain’s electricity grid, and that’s just the start. 

The water sector, too, is facing an uphill struggle in a changing world. In the UK, the situation is particularly dire as water companies, after years of under-investment, have attracted criticism from all sides for dumping raw sewage in rivers and the sea as ageing systems just can’t cope. Water companies have proposed a £100bn capital spending plan between 2025 and 2030 to tackle the problem. These numbers are huge, and the money’s going to have to come from somewhere. It is likely that investors will have to foot the bill. 

This suggests that the once-dependable returns investors once received from utility companies are no longer on the cards. Investment returns are likely to fall, and in some cases, investors may even be asked to put up extra cash. 

The trend is already taking shape. In 2020, SSE, one of the UK’s largest electricity suppliers and distributors, announced that it would cut its dividend to fund future growth after it sold its energy-supply business. Another cut followed earlier this year as part of the company’s reinvestment plans. The money that SSE is pouring into its network business should see its regulated asset base double from £8bn in 2022 to more than £16bn by 2027. 

National Grid hasn’t cut its dividend (yet), but it recently announced a mammoth £7bn fundraising to help fund a £60bn investment plan in both its UK and US markets set to take place over the next five years, double the sum spent over the previous five. The company said the investment would help underpin a 10% compound annual growth rate in its asset base (compared to 14% for SSE) over the next five years.

Challenges faced by the global energy sector

Both SSE and National Grid are investing today to drive growth in the future, which is the trade-off these businesses and investors are going to have to make in the coming years. Returns are no longer assured, but long-term growth is on the cards for those willing to stick around. 

That said, there will be some challenges along the way. These industries are heavily regulated, and the building and planning system in most countries is also heavily regulated. The UK’s planning system has drawn headlines for its complexity, but other countries have similar problems. 

The world’s re-wiring has captured the attention of the media over the past few years, but there has been another global issue brewing below the surface: water security. The problems with Britain’s water providers have been well-publicised. Ageing infrastructure can’t cope with storm surges and a modern population. 

In Spain, it’s a matter of not having enough water rather than too much of it. Parts of the country are suffering one of the worst droughts on record, and that’s before the summer has even started. Like electricity providers, water companies face a large bill to future-proof their networks. This will prove a headache for most businesses. Water is a highly regulated industry, and even where it’s not, the threat of government intervention is never far away. So, while the industry may look attractive, it shouldn’t be deemed risk-free. 

There are now question marks hanging over the sustainability of the returns water companies have provided their investors for so long. After over a decade of sucking as much money as possible out of Thames Water, the company’s owners have marked down the value of the company’s equity, in some cases to zero. There is no money left for investors. 

Thames’s problems are not an isolated case. According to the Financial Times, the 16 water monopolies in England and Wales paid out a total of £78bn in dividends in the 32 years between privatisation in 1991 to March 2023, while chalking up £64bn in net debt. Infrastructure spending over the period totalled £190bn. 

When the companies were privatised, they had no debt. Ofwat, the sector’s regulator, wants companies to get a grip on their finances. It is pushing them to reduce gearing – a measure of the ratio of debt to assets – from a sector average of around 68% to 55% by April 2025. 

That will require an equity injection of £5bn by 2030 and £8bn by 2035. Water UK, the industry’s trade body, said investors have pledged to inject £6.5bn in new equity as well as raising debt as part of a plan to invest £96bn by 2023. On top of this, costs will be passed onto billpayers. Companies have asked for bills to be hiked by as much as 70% by 2030 in some cases. 

Wherever you look in the global utilities sector, costs are mounting, and regulators are clamping down. As Warren Buffett has discovered, these challenges are turning a once lucrative sector into a minefield. Utilities are no longer a way to “stay real rich”.

Growing opportunities in the energy sector

That’s not to say investors should avoid the sector altogether. It’s changing, not failing. Whereas investors might once have expected to buy utilities for their dividends and hold them indefinitely, relying on their steady, dependable income, now investors have to look past the income to long-term asset growth. 

For example, National Grid has raised money from investors but now aims to grow its asset base at a double-digit annual rate. SSE has laid out similar targets. Assuming each company’s share price continues to trade in line with book value, investors should be able to pocket a double-digit annual capital return with some income thrown into the mix. 

So far, countries representing 90% of the world’s GDP have committed to decarbonising the planet by 2050. That’s a huge commitment to long-duration investment programmes. The total bill for this is going to be several trillion dollars, and politicians and regulators can’t afford to penalise investments: the public sector alone can’t afford the bill. 

As the team at Ecofin, which manages $1.9bn across private and public assets, including UK investment trust Ecofin Global Utilities and Infrastructure, told me, the “structural growth opportunities inherent in the energy transition” have only enhanced the attractiveness of infrastructure as an investment. Ecofin argues that the policy environment is becoming “increasingly supportive” of utilities’ rising to the challenge. 

And the qualities that have historically driven returns haven’t disappeared. The sector has always had high barriers to entry; I’d argue that these barriers have never been higher. The UK hasn’t built a new reservoir in three decades. There are now a handful in the pipeline, but it is expected to be decades before they’re in use due to planning and construction hurdles. Major UK renewable-energy projects are being delayed by more than ten years as the grid reaches capacity and new networks are bogged down in planning and construction bottlenecks. 

The same is true in the US and other developed nations. In Germany, it can take ten years for a project to get from the design to the commissioning stage, while in the US, it has taken one of BHE’s flagship projects 30 years of planning and construction to get anywhere near completion. It’s not easy to build energy infrastructure anywhere in the world, and that has only solidified the sector’s competitive advantage and monopolistic traits. That’s without touching on the vast sums of money that would be required to build a competitor to a company such as Thames Water. 

The best investments in the sector are likely to be the firms adapting to the changes and meeting regulatory issues head-on. This won’t come cheap, but as EcoFin notes, these businesses “are expected to be major beneficiaries of structural growth and attractive returns on significant capital investments”. However, “there will be winners and losers along the way”. Base investment decisions on “detailed fundamental analysis” and incorporate diversification – at the stock, sector and global levels. 

As EcoFin points out, companies and countries are moving at different paces and adopting varying strategies. In Europe, 80% of the largest European utilities’ earnings before interest, tax, deprecation and amortisation (Ebitda) is fully contracted and inflation-linked, thereby “de-risking these businesses”. That’s less common in the US, which is also less advanced when it comes to the energy transition.

Ten energy stocks to consider now

I’ve tried to make it clear throughout this article that utilities no longer offer a free lunch, and investors have to be careful where they invest. Despite the potential opportunities, the risks are growing, which investors need to keep in mind when looking for ways to play the energy transition. A plethora of London-listed investment trusts offer exposure to companies with a part to play in the energy transition. 

As William Heathcoat Amory, managing partner at investment service Kepler Partners, notes, trusts can be a better way to invest in the sector as they’re “cash flow-based, meaning that a high proportion of returns are seen as income paid every year, rather than a growth investment which is a lump sum that may or may not be returned at the end”. 

Trusts also have a “simpler, purer exposure” as they do not have to grapple with the “complexity of employing people” and tend to have limited development and construction risks. Amory cites the example of The Renewables Infrastructure Group (LSE: TRIG), which recently bought a battery developer to access this market. Renewables Infrastructure is the second-largest renewable-energy infrastructure trust listed in London, second only to Greencoat UK Wind (LSE: UKW). Its portfolio ranges from offshore wind in Germany and onshore wind in Sweden to solar power in France and battery-storage assets in England. 

According to the Association of Investment Companies, the trust trades at a 21.7% discount on the value of its assets and offers a dividend yield of 7.5%. Compared with Greencoat, which focuses purely on wind, Renewables Infrastructure’s diversification across sectors is highly attractive. Its peers, Greencoat Renewables (LSE: GRP) and the Octopus Renewables Infrastructure Trust (LSE: ORIT), offer a similar investment portfolio, and both are trading at discounts to net asset value (NAV) of between 20% and 30%. 

The Ecofin Global Utilities and Infrastructure Trust (LSE: EGL) doesn’t own assets in the same way. Instead, it owns a global portfolio of infrastructure stocks – a more diverse way to play the global energy transition. It has a big weighting in the UK-listed National Grid and SEE, both of which it believes are “very attractive” at recent levels, considering their capital investment and growth plans for the next decade and current valuation. 

Only 10% of the portfolio is invested in the UK. Just over 22% is invested in US firms such as NextEra Energy (NYSE: NEE), the world’s largest generator of renewable energy from the wind and sun as well as a leader in battery storage. 

The Imapx Listed Infrastructure Fund offers more sector diversification. Three of its top-ten holdings are water utilities, including United Utilities (LSE: UU) and Severn Trent (LSE: SVT). Roughly 44% of its assets are in North America, 42% in Europe, and the rest in Asia. 

United Utilities and Severn Trent, along with their peer Pennon (LSE: PNN), are interesting plays. The water sector in the UK has faced a lot of flak, and this does not look set to go away anytime soon. But these companies are likely to maintain their monopolistic traits, and all now look appealing with dividend yields of between 5% and 7%. But I’d only recommend buying them as part of a basket of utilities rather than individual picks to reduce risk. 

The iShares Global Clean Energy UCITS ETF (LSE: INRG) is an excellent passive option for investors looking for exposure to a portfolio of clean-energy companies at the forefront of the energy transition. 

For a US focus, investors could pick another exchange-traded fund (ETF), the iShares S&P 500 Utilities Sector UCITS ETF (LSE: IUSU), which offers exposure to the top utility players in the S&P 500, an excellent way to invest in the energy transition across the pond. For a global infrastructure play, there’s the iShares Global Infrastructure ETF (LSE: INFR), which holds the likes of NextEra Energy, but also key infrastructure providers such as Union Pacific.

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HMRC is becoming more concerned about the use of fractional shares on investment apps and platforms such as Freetrade, Trading212, InvestEngine and eToro, which have launched in recent years to appeal to younger and more tech-savvy investors. They let users research and build a portfolio of shares and exchange traded funds (ETFs) either in a general investment account or in stocks and shares Isa from their smartphone.

The apps also offer fractional shares, letting investors buy a portion of a stock rather than the full amount and hold it in an Isa from just £1.

This helps investors build portfolios of their favourite companies and can be cheaper than traditional DIY investment platforms.

Fractional shares are also regularly promoted by unregulated financial influencers on social media platforms such as Instagram and TikTok.

But the taxman has his eyes on this area of the market with HMRC recently warning fractional shares are not covered by Isa regulations.

An update from HMRC this week said a fraction of a share is not a share and therefore cannot be held in an Isa.

It highlights that the Isa Regulations only refer to whole shares and not parts or derivatives. 

“A fraction of a share does not give the investor the same legal rights as a whole share does,” says HMRC.

“Fractional shares could only qualify for inclusion if the Isa Regulations were amended to allow them. Where fractional shares are an underlying investment in a collective investment scheme or fund, for example an exchange traded fund, they are not subject to the same restrictions.”

Any Isa providers who allow fractional shares to be purchased or held within their Isa have been told to get in touch with HMRC.

This means investors could lose the tax-free status of fractional shares, and end up having to sell their investments and pay tax on any capital gains above the allowance.

Investing apps are hoping for clarity on the Isa status of fractional shares from HMRC and the Treasury in next month’s autumn statement, but how concerned should investors be?

The benefits of fractional shares?

Fractional shares let investors buy part of a stock rather than the full amount.

They have become popular in the US where share prices are particularly high and brokers argue that it lowers the barriers to entry for retail investors.

This may appeal to younger or more cautious investors building a portfolio.

Dan Moczulski, UK managing director of eToro, says fractional shares allow people to get the exact exposure that they want to a certain stock.

It lets users purchase fractional shares in a general investment account but not in an Isa.

“If someone wants to invest $500 in Apple, for example, they can do so without having to calculate the number of shares this sum of money can buy them,” he says.

“For example, at the moment, with Apple being priced around $180, somebody who wants to allocate $500 is forced either to buy $360 worth of shares or $540.

“Fractional shares also lower the bar to entry for retail investors, helping those who have less money to invest achieve diversification. For example, in the past, anyone wanting to buy shares in Warren Buffett’s Berkshire Hathaway b shares would not be able to do so if they weren’t willing to stump up the $343 needed for just one share. On eToro, you can start at $10.”

Tax risks

HMRC doesn’t have an issue with fractional shares as a concept, but the Financial Times reports that it has told investment platforms and the Treasury that they are not eligible for inclusion in Isas.

This is one reason why eToro says it doesn’t offer fractional shares as part of its Isa. Instead, it has a partnership with robo-wealth manager Moneyfarm.

But other providers such as FreeTrade, Trading212 and InvestEngine have let investors build Isa portfolios with fractional shares.

An HMRC clampdown may not hit all investing app users though.

Trading212 lets users invest in fractional shares across UK and US stocks, InvestEngine investors can use this strategy with ETFs but Freetrade only offers it on US shares. This means investors on Freetrade who solely back UK stocks will only own full shares.

Not all app investors will hold their fractional shares in an Isa either.

Freetrade, which launched in 2018 and added US-listed fractional shares in 2020 says of its 650,000 UK users, just 80,000 have Isa accounts.

Of these, fewer than 50% of those accounts hold at least one fraction of a share.

Investing apps such as Freetrade, InvestEngine and Trading212 have said they disagree with HMRC’s approach and are calling for clarity.

Users are still able to open Isas and add fractional shares on these investing apps in the meantime.

“We’re deeply disappointed with HMRC’s position which appears to be based on a misunderstanding of how brokers like us offer fractional shares,” says Adam Dodds, chief executive of Freetrade.

“Our fractional shares give retail customers ownership of a portion of an actual company share. They are not a derivative contract. The protections and benefits for retail investors are effectively the same as for whole shares.”

He said Chancellor Jeremy Hunt’s autumn statement provides the “perfect opportunity” to clarify the rules.

“Any change should be made with retroactive effect to put this matter to rest,” he adds.

“It would represent a huge step forward for the government which has expressed its intention to champion the interests of retail investors.”

HMRC is standing by its position for now but ISA account holders may not need to worry as it is the provider who is liable for any tax owed.

The Isa manager would need to sell or remove the ineligible investments and the proceeds can then usually remain within the Isa and be used to buy eligible investments. Alternatively, the investor may retain the fractions outside the tax-free wrapper.

“Our long-standing view is that a fraction of a share cannot be held in an ISA,” says an HMRC spokesperson.

“We have engaged extensively with the ISA sector on this issue.

“When an ISA manager allows investment in non-qualifying assets, we would seek to recover any tax loss from the ISA manager rather than the investor where possible.”

Although still the world’s third-largest economy, Japan Inc. has languished over the past three decades. As Nicholas Gordon notes in Fortune magazine, in 1995 there were 149 Japanese firms in the magazine’s Global 500 list of top companies as measured by revenue. That was a close second to America’s 151. Today there are just 41 Japanese companies on the list, compared with 136 from the US and 135 from mainland China. 

In the late 20th century, Japan was renowned for its innovative electronics, cars and video games, but the internet boom has largely passed it by. Norihiro Yamaguchi of Oxford Economics points to a stagnant economy and a “cautious investment culture” as the culprits. 

Yet years of pain may have caused investors to overlook a bargain: the Topix index, a broader gauge of the market than the Nikkei, is “still a fifth cheaper than other developed markets on an earnings basis”. The true discount might be even bigger when you factor in “Japanese accounting’s harsher depreciation charges... particularly versus US companies, who are prone to overstating their profits”. 

This year has brought a renewed bout of enthusiasm for Japanese stocks. Warren Buffett visited the country in April. Berkshire Hathaway, his investment company, has made impressive returns of late from taking positions in local trading companies (known as “sogo shosha”), one way to gain broad market exposure. 

For markets, Buffett’s visit was interpreted as a blessing imparted upon Japanese equities, bestowed by one of the investment greats. The Topix has soared by one quarter this year, making it one of the world’s best-performing markets, while the Nikkei has topped 33,000 points for the first time since 1990. 

Reform story has room to run

A key plank of the Japanese bull case is that corporate reforms initiated by Shinzo Abe post-2012 have laid the groundwork for “a sustained improvement” in the profitability of Japanese firms, say Marcel Thieliant and Thomas Mathews of Capital Economics. But the record is mixed. 

Valuations suggest that the corporate reform story still has room to run. This year the Tokyo Stock Exchange (TSE) has started pushing firms with a price-to-book (p/b) ratio of less than one, to up their game, say Masaki Taketsume and Taku Arai of Schroders. Management at firms with consistently low valuations will be required to present plans to remedy the problem. 

A p/b of less than one means that the market is valuing the company at less than its assets are worth, which suggests that a company’s capital is not being well used. As of the end of May, slightly over half of TSE stocks traded at this deeply discounted level. There is thus plenty of low-hanging fruit for Japanese managers to pick to give share prices a lift.

On other metrics, Japan also looks cheap even after this year’s rally. As of 31 May 2023, Japanese stocks were on a cyclically adjusted price-to-earnings (Cape) ratio of 14, a 15% discount to the 15-year median and the same level as the historically cheap British stock market. 

Nobody is betting on a repeat of Japan’s 1980s mania. Decades of stagnation have made permabulls all but extinct in the land of the rising sun. Yet its sun doesn’t need to rise right overhead to warm up your portfolio. 

All investors in Japan need is for corporate reform to keep delivering steady improvements in shareholder value while it charts a path back to normal monetary policy. Japan offers reasonable valuations, a pro-market government and a degree of political stability that is the envy of most of the democratic world. Long out of favour and lost in translation, Tokyo’s capacious equity market contains plenty of hidden bargains. 

Invest in Japan: What to buy

Japanese stocks make up 6% of the MSCI World index of developed markets. “All investors should have some exposure... [5%-10% of your portfolio] would be broadly sensible,” Rob Morgan of Charles Stanley tells Leonora Walters in the Investors’ Chronicle. 

Of the large-cap tracker funds, the Fidelity Index Japan Fund has the lowest ongoing charge at 0.1%. Other trackers include the iShares MSCI Japan (LSE: IJPN) and the Vanguard FTSE Japan (LSE: VJPN), which have ongoing charges of 0.59% and 0.15% respectively. The latter two have returned 11% over the last five years and 70% over the last ten years in cumulative capital gains, providing a useful benchmark against which to test active managers. There is a robust case for active funds in Japan: the market contains hundreds of under-researched small companies, raising the odds that a savvy manager can net a few bargains. 

The Baillie Gifford Japan Trust (LSE: BGFD), which focuses on medium and smaller-sized firms, has slipped by 3% this year. On a ten-year view, the 125% gain is creditable, however, especially when you consider the 1.21% dividend on top. The trust has a 0.66% ongoing charge and trades on a 6% discount to net asset value (NAV). It should offer broad exposure as Japan’s economy continues to revive.

Similarly, the JPMorgan Japanese Investment Trust (LSE: JFJ) also pays a dividend and has outperformed the Baillie Gifford Trust over the past five years. It has a competitive 0.7% ongoing charge and trades on an 8% discount to NAV. The Fidelity Japan Trust (LSE: FJV) doesn’t pay a dividend and has gained 148% over the last decade. There is a 0.94% ongoing charge and the 12% discount to NAV means that investors are getting a sizeable extra discount on top of Japanese assets that are already cheap. 

The Schroder Japan Trust (LSE: SJG) has gained 12% so far this year. It also pays a 2.1% dividend yield. But the trust went nowhere in the five years before 2023. Wary investors have thus slapped a 10% discount to NAV onto the trust. It has a 0.92% ongoing charge. 

Finally, the AVI Japan Opportunity Trust (LSE: AJOT) takes an activist approach to unlocking value in corporate Japan. It buys into overcapitalised small and mid-cap firms that look undervalued and then engages with management to encourage it to take steps to unlock shareholder value. The ongoing charge of 1.61% is high, but is arguably justified by the extra work required. The trust only launched in October 2018, but early signs are encouraging, with a 15.8% gain since launch. The concept seems to have captured the imagination of investors, so it trades on only a slight discount to NAV and yields 1.32%. It is one to watch.  

Legendary investor Warren Buffett has built an enormous fortune and is one of the richest people in the world.

His recent decision to step down as CEO of Berkshire Hathaway has sent shockwaves through the financial world, causing the 94-year-old’s net worth to shrink.

But despite the setback, he is still worth $160 billion, and ranks in the top ten on the Bloomberg Billionaires Index, just behind Microsoft co-founder Bill Gates. Buffett has consistently trailed Gates on the rich list since it launched in 2012.

As the CEO and largest shareholder of Berkshire Hathaway, Warren Buffett has made several successful strides, including generating average annual returns of 19.8% between 1965 and 2023 — roughly double what the S&P 500 gained over the same period, according to The Motley Fool.

We look at how Warren Buffett built his fortune and what his upcoming retirement means for investors and Berkshire Hathaway.

Warren Buffett’s early years

Born in 1930 in Omaha, Nebraska, Buffett showed an early interest in business. Buffett's father was a stockbroker and served as a role model for the young investor.

As a child, he would buy six packs of Coca-Cola for 25 cents and sell each bottle for a nickel, making a tidy profit. He also started a pinball business and purchased the newspaper Buffalo News in 1977.

Buffett grew his newspaper business over the years with the addition of local papers — but in 2020, he decided to sell 31 newspapers for $140 million.

After high school, Buffett attended the University of Nebraska but transferred to the University of Pennsylvania's Wharton School of Business.

In 1951, Buffett received his master's degree in economics from Columbia University. At age 24, he received a job offer from his mentor Benjamin Graham, with a salary of $12,000, reports Dividend Growth Investor.

His annual salary was thrice the annual median income for an average family in 1954, according to US Census Bureau data, which means Buffett was already well on his way towards accumulating wealth. Two years later, his net worth was already $140,000.

Warren Buffett's early partnerships significantly influenced his success as an investor and businessman. In the 1950s and 1960s, Buffett formed several partnerships that allowed him to pool his resources with other like-minded investors. These partnerships enabled him to invest in larger and more complex deals than he would have been able to do on his own.

How Benjamin Graham inspired Warren Buffett

Buffett studied at Columbia University’s Business School under Benjamin Graham, a renowned value investor who would later become his mentor.

Benjamin Graham is considered to be the father of value investing. He began his career in finance in the early 1920s, although he quickly realised that most investors were focused on short-term gains and speculation rather than investing in companies with strong fundamentals, such as robust balance sheets.

With this knowledge, he went on to develop his own investment philosophy, focusing on buying undervalued stocks. He believed buying equities cheaply, holding them for the long term and selling them when the market had realised the value was a great way to make money. Put simply, Graham believed that by carefully analysing a company's financial statements and other fundamental data, he could identify stocks trading at a discount to their true value.

This mentality shaped Warren Buffett's view of the world from a young age.

How Warren Buffett built Berkshire Hathaway

One of his most significant deals was Berkshire Hathaway. When Buffett first started buying the stock in the late 1950s, the business was a struggling textile manufacturer. He decided to try to buy enough shares in the business to force management to buy him out at a higher price – earning a handsome profit.

Management refused and Buffett lashed out, buying control and kicking the former management out.

Over the next few years, Warren Buffett wrestled with the business. He kept a tight rein on costs and used any excess cash to expand and diversify.

He started building on his empire with the acquisition of two small insurance groups. These companies gave Buffett an edge. Insurers have large portfolios of investments, giving Buffett a lot of flexibility around where and when he could invest. Over the years, the company has continued to acquire other insurance companies, including GEICO and General Re.

Despite these additional investments and diversification, Berkshire’s insurance businesses remain at the core of the group today. Berkshire Hathaway also owns a load of other well-known companies, including the battery brand Duracell and Dairy Queen ice cream parlours. Buffett now has 41 stocks in his Berkshire Hathaway portfolio.

Warren Buffett’s investing style

Buffett is known for his successful investing style. Historically, he has searched for undervalued companies that have a strong foundation and a competitive edge within a specific market. He then invests in these companies for the long term.

As a result, he has made impressive returns. Some of Berkshire Hathaway’s famous investments include Apple, Coca-Cola, American Express, Moody’s and several Japanese trading houses like Mitsubishi.

Looking to the future, Buffett has said he is not keen on the use of artificial intelligence (AI).

According to Motley Fool, Buffett expressed the opinion at the May 2024 Berkshire Hathaway shareholder meeting, comparing AI to a genie in a bottle: “It’s partway out of the bottle. We may wish we’d never seen that genie, or it may do wonderful things.”

Buffett is also known for his philanthropic efforts, including his commitment to giving away the majority of his wealth through the Giving Pledge – a commitment by some of the world's wealthiest individuals and families to give away the majority of their wealth to address society's most pressing problems.

We look at how to rival Warren Buffett when it comes to funds and trusts, and how to invest like him.

Who will replace Warren Buffett at Berkshire Hathaway?

At Berkshire Hathaway’s annual meeting on 3 May, the investor announced that he would retire as CEO, in a shock to shareholders and the rest of the world.

Berkshire Hathaway announced that Greg Abel would be appointed as the next president and CEO. The 62-year-old currently serves as the chairman and CEO of Berkshire Energy and the vice-chairman of its non-insurance operations.

In his farewell address, Buffett said: “I think the time has arrived where Greg should become the chief executive officer of the company at year end.”

However, he insisted he would keep his fortunes invested in the company. “I have no intention – zero – of selling one share of Berkshire Hathaway. I will give it away eventually. “The decision to keep every share is an economic decision because I think the prospects of Berkshire will be better under Greg’s management than mine.”

As per Forbes, the conglomerate’s shares dropped by 5%, taking away more than $30 billion from its market capitalisation. Buffett’s fortunes also shrank by $8.9 billion.

The good news for investors is that Buffett will still serve as the chairman of the board once he retires, Berkshire confirmed on 5 May.

The CRUX Asia ex-Japan Fund aims to find the highest-growth companies in the region by identifying opportunities in the market before the mainstream becomes alert to their potential, and holding them for three to five years through their early and mid-growth phases.

We look for companies on course to generate revenue growth of 15% per annum, irrespective of size. This often means we are positioning the fund to benefit from technological disruption. We do not buy blindly into an idea. Our strategy is to marry conviction in a theme with a thorough bottom-up approach: is management top-quality? Does the company have an edge via intellectual property or a process that is hard to replicate? And, critically, does it have adequate capital to deliver? One area where we have high conviction for growth potential is the electric-vehicle (EV) industry in China. These are the three Chinese EV carmakers we think are best positioned and can grow market share.

Drawing comparison with Tesla

Firstly, the dragon in the room: BYD (Hong Kong: 1211). Weighing in at $95bn market cap and selling for 12.5 times forecast 2025 earnings, BYD is notable for being early to EVs, and for gaining early support from Berkshire Hathaway’s Warren Buffett.

With 1.87 million EV vehicles delivered last year, BYD has sparked furious debate as to how comparable it is to Tesla, which produced 1.31 million pure electric-battery vehicles. Besides scale, BYD’s biggest advantage is being highly integrated – it also makes the batteries and many of the electronic parts that go into their cars.

Then there is the worldly old-hand, Geely Automobile Holdings (Hong Kong: 175). Geely Auto, its parent Zhejiang Geely, or its owner/operator Li Shufu either owns or holds long-time stakes in British, European and Asian carmakers.

The most recognisable is the London Electric Vehicle Company, which makes the iconic London black cabs. Geely also owns Volvo Car, Polestar and Lynk & Co, and has stakes in Aston Martin, Proton and Lotus. Though well- established abroad, Geely sells many more cars at home.

This $13bn market cap firm’s domestic EV offerings are thoughtful and well targeted; we expect Geely to re-rate eventually as an EV carmaker, from the legacy carmaker valuation it has now. Geely is on a 2025 price/earnings (p/e) ratio of 9.1.

Young upstart will roar ahead

Finally, the young upstart – Li Auto (Hong Kong: 2015). We think this $25bn market cap company, established in 2015, has the highest risk/reward profile of the new Chinese EV carmakers and is the most comparable to an early Tesla.

Li Auto’s focus should allow it to dominate its niche in family sport-utility vehicles (SUVs), which are bigger cars that borrow design elements from heavier duty off-road vehicles. It is concentrating its manpower, engineering and manufacturing into a simple product offering with a lower price point and a higher-value proposition than competitors, which we believe will enable it to gain market share from established (and perhaps more complacent) brands. Li Auto is trading at 21 times forecast 2025 profits.

As we enter the new year, we’ve asked our contributors to put together their top investment ideas for 2023. Their ideas span everything from gold, silver and bitcoin to the best stocks for yield and psychedelic treatments.

Top investment ideas for 2023

Jonathan Compton

Jonathan Compton was MD at Bedlam Asset Management and has spent 30 years in fund management, stockbroking and corporate finance.

My pick is UK-listed Kape Technologies (LSE: KAPE), a £950m company that has been dragged down even as revenue and profits have blossomed and the outlook brightened.

It specialises in virtual private networks (VPNs) and cybersecurity. You probably don’t use a VPN on your PC or tablet today, but many of us will because it provides an encrypted server and hides your IP address from spammers, hackers and prying eyes.

In short, it keeps your data far safer than conventional security packages. Seven million customers already use Kape, while the market for computer privacy is huge and expanding fast; we’re all fed up with torrents of spam and hackers.

The forward price/earnings (p/e) ratio for 2023 is below eight.

Stephen Connolly

Stephen Connolly is managing director of consultancy Plain Money. He has worked in banking and asset management for over 25 years.

The US-listed conglomerate Berkshire Hathaway “B” shares (NYSE: BRK.B) is led by legendary investor Warren Buffett.

It’s ending 2022 in positive territory, up 3%, trouncing the S&P 500 index’s -16.7% fall. This outperformance from its undervalued investments across diverse sectors such as energy, technology, transport and financial services in companies such as Coca-Cola, American Express and Apple shows once again that Buffett knows his business.

Such skill is rare – only one in four fund managers beat index trackers this year, according to broker AJ Bell. Nearly two-thirds of them failed over a decade as well, a period when markets were relatively benign.

The new year will not, unfortunately, herald a fresh start and 2023 will remain difficult. So I’m going to keep quietly dripping my money into Berkshire.

Dominic Frisby

Dominic Frisby is the world’s only financial writer and comedian. He is MoneyWeek’s main commentator on gold, commodities, currencies and cryptocurrencies.

It’s hard to think of a time in the history of bitcoin when sentiment was lower.

However, usage is exploding in East Asia. It’s exploding in Africa, especially in Nigeria. It is exploding anywhere there is a currency crisis: Turkey, Venezuela, Argentina.

The member nations of the Shanghai Cooperation Organisation (China, India, Russia et al) are desperately seeking a non-dollar alternative money to trade in.

The issue is who will be the trusted third party in a world where trust is thin.

We need “a blockchain-based system of international settlements that … will not depend on banks or interference by third countries”, said Vladimir Putin last week. Bitcoin is international, independent settlements system that eliminates the need for trusted third parties.

Cris Sholto Heaton

Cris Sholto Heaton is an investment analyst and writer who has been contributing to MoneyWeek since 2006 and was managing editor of the magazine between 2016 and 2018.

Energy is going to be a critical theme over the next few years.

There are many interesting opportunities in this sector, but I’ll highlight one that may not be familiar. Woodside Energy (LSE: WDS) merged with BHP’s oil and gas interests when the latter restructured last year, and added a secondary London listing to its main listing in Sydney.

Woodside is really a play on liquefied natural gas (LNG), which is an increasingly important source of supply, especially in Asia. Slightly under 50% of its portfolio is in LNG and about a quarter in piped gas. Annual production is forecast to rise by more than 20% by 2027 after its Scarborough LNG project off the coast of Western Australia starts up in 2026.

At Monday’s price of 1,960p, the stock trades on 6.5 times estimated 2022 earnings and a forecast dividend yield of around 10%. Investors are getting paid well to wait for growth.

Frédéric Guirinec

Frederic is an investment analyst. He started his career at JP Morgan in Paris. He has more than ten years of experience investing in private equity and also worked with the 3i debt management team investing in private debt.

I will focus on food here. While agricultural commodities prices have now fallen back from the highs printed in 2022, they allowed food-processing companies to increase prices and margins.

Companies such as General Mills, Nestlé or Mondelez are fully valued, but I would consider Premier Food (LSE: PFD) or Norwegian conglomerate Orkla (Oslo: ORK), which could be broken up.

In addition, palm-oil producers are out of institutional investors’ reach for sustainability reasons, but companies in the food sector are looking to reduce costs and will keep using cheap ingredients. This will favour the likes of MP Evans (LSE: MPE) or Sipef (Brussels: SIP).

David C. Stevenson

David Stevenson has been writing the Financial Times Adventurous Investor column for nearly 15 years and is also a regular columnist for Citywire. David is executive director on a number of stockmarket listed funds including Gresham House Energy Storage and the Aurora Investment Trust.

Compass Pathways (Nasdaq: CMPS) is a US-listed, UK-based life-sciences stock with a difference. It is the leader in clinical research into psilocybin (or magic mushrooms to the rest of us) for psychiatric disorders.

Psychedelics cause almost no dependency and are proving highly reliable in early stage trials. There are some difficulties, notably the setting in which the drugs need to be taken (preferably with a trained counsellor) and the current trials will hopefully rectify these.

It also has enough cash on the balance sheet to get it through the crucial next two years, which in my view will prove decisive for this promising area of research.

If the trials succeed, big pharma will come knocking. I own shares and have been adding to my holdings over the last few months.

Mike Tubbs

For decades, Dr Mike Tubbs worked on the 'inside' of corporate giants such as Xerox, Battelle and Lucas. Working in the research and development departments, he learnt what became the key to his investing. Knowledge which gave him a unique perspective on the stock markets.

This year I am playing it safe after noting that company insolvencies in England and Wales were up by 38% year on year to 1,948 for October 2022. They could increase if the country falls into a recession.

I am therefore recommending Begbies Traynor (LSE: BEG), which handles the UK’s largest number of corporate insolvencies, together with personal insolvencies, corporate finance, company valuations, sales of company assets and property consultancy.

The forward dividend yield is a healthy 2.6%.

Chairman Ric Traynor’s first-half statement said that he expects continued growth and is confident about delivering on full-year market expectations.

James McKeigue

James is currently the managing editor of LatAm INVESTOR, the UK's only Latin American finance magazine.

Feel like you had a tough year? Spare a thought for shareholders in Brazil’s national oil company, Petrobras (NYSE: PBR).

The firm is on target to post record profits and pay its highest-ever dividend in 2022, yet its share price is down 19% since the start of the year. The last few months have been particularly brutal, with the stock falling by 43% since 21 October.

That has left the profitable, well-managed oil producer looking ridiculously cheap.

It trades on a p/e of 1.7, compared with peers such as Shell that trade on a p/e of 4.8. Petrobras is also generous with its cash, currently offering a 2022 gross dividend yield of 27%, according to Bloomberg, although this is likely to change depending on profits.

Andrew Van Sickle

Andrew is the editor of MoneyWeek magazine.

The price of silver, having drifted downwards for most of the year, has suddenly come alive, jumping by 25% since early November to $23 an ounce. There should be plenty more gains ahead.

Solar panels, electric vehicles and 5G mobile technology are three key growth areas requiring silver.

Batteries for electric vehicles need up to twice as much silver as their counterparts designed for internal combustion engines, while one estimate foresees an 85% increase in annual silver consumption by the solar industry in a decade.

You can track the spot price with the WisdomTree Physical Silver ETF (LSE: PHSP). Just remember that it can be gold on steroids to the downside too.

One of Warren Buffett’s best-known expressions is “economic moat”. It refers to some companies’ ability to maintain competitive advantages over their rivals, helping them protect their profits and market share. An example of a company with an especially wide moat is Coca-Cola, in which Buffett’s investment vehicle, Berkshire Hathaway, has a $24.8bn stake.

Buffett first paid $1bn for a 6.2% stake in Coca-Cola in 1988 after the shares had fallen in the 1987 stockmarket crash. He felt it was a good company with a wide moat and was poised to recover. Buffett’s confidence in the firm was well founded: Coca-Cola’s shares rose 26-fold between May 1988 and April 2022. The company’s wide moat is based on it having the world’s strongest brand, while its massive size and geographic reach help it keep a lid on costs through economies of scale.

Five crucial characteristics of stocks with wide moats

The five main sources of a wide moat are intangible assets (brands, patents, exclusive licences and the like); a cost advantage; switching costs (that make it expensive or laborious for customers to change supplier); network effects (meaning a product or service becomes more valuable the more people begin to use it) and efficient scale (markets such as water supply that are best served by one or two companies in a given area). A firm with a wide moat often has two (Coca-Cola, for instance), or even three, of these factors contributing to its moat. The following examples illustrate these five sources.

Intangible assets include brands such as Coca-Cola or Diageo (with labels such as Johnnie Walker and Smirnoff) and patents. Pharmaceutical firms depend on patents to protect blockbuster drugs. For example, AbbVie’s patent-protected drug Humira for rheumatoid arthritis was the world’s best-selling drug from 2012 to 2020, when sales reached $20.4bn. But patent protection is now ending and several cheaper generic versions are due to be launched in 2023.

Switching costs are the main element of Salesforce.com’s wide moat. Salesforce was the first company to develop software as a service (SaaS) with its customer-relationship management (CRM) software on its Sales Cloud. This is now the best CRM package available. Firms switching would risk losing data and have to retrain their salesforce to use new software. That would be expensive, while revenue would also be forfeited during the upheaval caused by the change. Salesforce invests 20.7% of its annual sales in research and development (R&D) to ensure its products remain the best available.

Network effects are a major component of Alphabet’s moat, along with its brands (Google search, YouTube, Android, and Maps) and intangible assets (brands, algorithms, machine learning and accumulated customer data). Network effects stem from its vast array of customers, which means it can collect much more data; in addition, this data and the large customer base enable advertisers to get value for money from their expenditures, so Alphabet entices more advertisers. Amazon benefits from network effects (more buyers and sellers attract yet more buyers and sellers to its platform in a virtuous circle), but cost advantages, intangible assets and switching effects also contribute to its wide moat.

Cost advantages are exhibited by Amazon (thanks to its purchasing power, logistics, and vertically-integrated structure) and by Coca-Cola through its scale and market share (it is a duopoly with Pepsi).

Efficient scale provides a moat for Enbridge, the Canadian pipeline company. UK utility companies, such as water companies, also have efficient scale but the regulator controls their profits, so they are unable to exploit their moats to achieve higher margins in the way some of the firms mentioned above do.

The 9 most competitive British blue chips and their overseas counterparts

Firms with wide moats form a small minority of FTSE100 companies, with just over one-fifth of the FTSE100’s top 50 firms having this attribute. Nine are in the top 25 companies by market capitalisation.

The nine firms with wide moats in the top 25 include AstraZeneca and GSK (thanks to patents, economies of scale and powerful distribution networks, and Unilever, Diageo and Reckitt Benckiser (brands and cost advantage). There is also British American Tobacco (brands, cost advantage and regulations on advertising making it impossible for new entrants to challenge it); London Stock Exchange (a vertically-integrated financial exchange with comprehensive databases enhancing its switching costs and intangible assets); BAE Systems (switching costs, intangibles including technology and close relationships with defence ministries) and Experian (intangibles such as its database on consumers and businesses, and the difficulties confronting any new business trying to collect and amass such data).

We have already mentioned Alphabet, Amazon, Coca-Cola and Salesforce.com as examples of firms with large moats. To these we can add several in other sectors, such as 3M (a diversified group with over 60,000 products, known for inventing Post-It notes); Adobe (the publishing software company); ServiceNow (SaaS software solutions to automate business processes); Ecolab (cleaning and sanitation products); Tyler Technologies (software for US local authorities); and Mercado Libre (the largest e-commerce marketplace in Latin America). In pharmaceuticals examples include Novo Nordisk (world leader in diabetes treatments) and Merck (strong in patented cancer immunotherapies, with drugs such as Keytruda).

It is important that a wide moat endure, ideally for many years after you invest in the company. For pharmaceutical firms relying on patent protection, a serious problem can arise if they are approaching a “patent cliff” – this occurs when the patents on a super-blockbuster drug, or several best-selling ones, are all due to expire over a short period. An example of how a company can depend mainly on one (or few) drugs is AbbVie’s reliance on its best-selling rheumatoid arthritis drug Humira. It was the world’s top-selling drug, with sales rising from $7.9bn in 2011 to $20.7bn in 2021.

Humira accounted for 58% of AbbVie’s sales in 2019 and 37% in 2021 as sales of new drugs emerging from the pipeline rose. Humira’s US patent (most sales are in the US) expires in 2023, so it is just as well that newer drugs are coming onstream: Humira’s sales will decline from 2023 as rivals introduce cheaper generic versions of the drug. Another potential problem for pharmaceutical companies is legal action over drugs’ side-effects; witness the recent jitters at GSK and Haleon over Zantac, a heartburn drug that lawsuits allege is carcinogenic.

Mistakes to avoid

Brands can suffer if a firm doesn’t take good care of them. BlackBerry is a good example. It dominated the business smartphone market more than a decade ago, but did not keep up with Apple and Android, while its Playbook tablet failed. Blockbuster Video failed to move with the times; in 2000 Netflix approached Blockbuster, offering to sell itself for $50m. Blockbuster turned down the offer and went bankrupt in 2010.

These examples also illustrate the way in which disruptive technological change can wreak havoc with established companies if they don’t fully embrace change. Take Kodak: the first digital camera was invented in Kodak’s R&D labs by Steve Sasson in 1975. The board treated it as an interesting experiment and chose not to publicise or pursue it. Kodak failed to develop it and then embrace the internet and its possibilities for fear of cannibalising the profitable silver-halide photography business, in which it was the global leader. Kodak filed for bankruptcy in 2012.

Cost advantages from large-scale operations can dwindle if a company loses customers through poor service or a change in technology. For example, Nokia lost 96% of its once-dominant market share between 2007 and 2012 as it failed to compete with Apple and Android smartphones.

The reduced sales volumes meant it would have been hard to manufacture new, competitive products as cost-effectively as before even if it had managed to come up with them. However, Nokia reinvented itself as a provider of mobile-network equipment and is now the world’s third-largest seller of such equipment.

Even large, respected companies with wide moats can launch products that flop. But most can survive when their flops affect only a modest proportion of annual sales – and provided mistakes are corrected and the company learns from them. Coca-Cola, for instance, which had been losing market share to PepsiCo’s cola in the early 1980s, decided to change its formula and call the result New Coke. It was launched in 1985.

The new drink was greeted with public outrage and was withdrawn after a few months. The original formula was reintroduced and rebranded as Coca-Cola Classic. A second example is the Apple Newton, a personal digital assistant launched in 1993, which sold only 50,000 in its first four months. The whole product line was discontinued in 1998.

It sometimes takes a long time for the merits of a firm with a wide moat to be recognised by investors, and hence for its share price to reflect its quality and potential. A good example is ASML, the market leader in precision lithography, which is the key step in making semiconductor chips. ASML has only one competitor, Nikon, and ASML’s market share is 62%. It also has a monopoly on extreme ultra-violet (EUV) lithography systems, used to make the most advanced chips.

But ASML’s share price was €71 in mid-2000, fell to €14 in late 2008 and did not regain €71 again until September 2013. The shares then powered on to a peak of €770 in late 2021 as it became obvious that EUV was a critical technology. However, ASML shipped the first prototype EUV system to a key customer in 2010 when the share price was under €30. ASML was then the only company developing EUV, so investors had plenty of opportunity to take the hint and invest. Those who did invest at €27 in late 2010 saw the share price increase by over 28 times to €770 by November 2021.

What to look for

There are several key characteristics to look for when hunting for businesses with wide moats. These are the likely longevity of the moat, the odds of strong market growth continuing, high margins and low debt. And a company needs to avoid mistakes that can prejudice its reputation, brand or market share. We have seen how a wide moat can be impaired and a new disruptive technology can quickly cause problems for a global leader in an apparently impregnable market position.

Continuing sales growth with a consistently high margin is an excellent indication that a company’s wide moat is intact and that its market niche is still growing. The importance of low debt is, firstly, that should interest rates rise, the company will not be saddled with rising payments that could reduce profits and limit strategic options. Secondly, low debt gives the company the financial flexibility to rectify any mistakes, such as a product flop.

Three options for investors

There are three ways of investing in a diversified set of firms with wide moats. The first is to select your own set of companies with wide moats chosen from several sectors and with an eye to the dividend yield you are targeting. The second is to go for an investment trust with a substantial proportion of its holdings in such companies – preferably one trading at a discount to the value of its portfolio of companies (at a discount to its net asset value, or NAV, in other words).

The third is to choose an exchange-traded fund (ETF), such as the VanEck Morningstar Global Wide Moat UCITS ETF (LSE: GOGB), which tracks companies investment research group Morningstar has identified as having wide moats.

This ETF consists mainly of defensive consumer stocks (Kellogg, Imperial Brands, British American Tobacco, Constellation Brands, Ambev), technology (Roper Technologies and Tyler Technologies) and healthcare companies (Gilead Sciences) in its top ten investments. This ETF was launched in mid-2020 and has risen by 29% since then compared with 21% for global large-cap equity ETFs over the same period. An example of a global investment trust with a yield in the 2%-4% range is Nick Train’s Finsbury Growth & Income Trust (LSE: FGT). Firms with wide moats make up 48% of the portfolio. The top ten investments include Diageo, Experian, London Stock Exchange and Unilever, together with enterprise-software provider Sage, snacks giant Mondelez and Remy Cointreau. The current discount to NAV is 4.2% and the dividend yield is 2.3%.

Another global trust, with less emphasis on the UK, is the Bankers Investment Trust (LSE: BNKR). Among its top ten holdings are American Express, Microsoft and Oracle. Around 48% of the fund’s holdings are firms with wide moats and the current yield is 2.6%. It is on a discount to NAV of 7.7%.

A potential portfolio of stocks with wide moats

The third alternative is to build your own portfolio of businesses with wide moats. Let us assume that an investor wants reasonable diversification through stakes in between ten and fifteen such companies from different sectors and wants to include some stocks paying dividends. Possible companies to select from include AstraZeneca (LSE: AZN), Merck (NYSE: MRK) and Roche (Zurich: ROG) in pharmaceuticals; Medtronic (NYSE: MDT) in health (medical devices); Diageo (LSE: DGE), McDonald’s (NYSE: MCD) and Reckitt Benckiser (LSE: RKT) in consumer goods; Alphabet (Nasdaq: GOOGL), Amazon (Nasdaq: AMZN), ASML Holding (Nasdaq: ASML) and Microsoft (Nasdaq: MSFT) in technology; Experian (LSE: EXPN) and Visa (NYSE: V) in financials; and BAE Systems (LSE: BA) and Raytheon Technologies (NYSE: RTX) in defence.

All these companies except Alphabet and Amazon pay dividends. Yields exceed 3% at BAE Systems, Medtronic and Merck. In the 2%-3% range you will find AstraZeneca, Diageo, McDonald’s, Raytheon, Reckitt Benckiser and Roche. Down in the 1%-2% range are ASML and Experian. Microsoft and Visa yield less than 1%. Seven of these companies (Alphabet, Amazon, ASML, Experian, Medtronic, Microsoft and Roche) have share prices well below Morningstar’s estimate of their fair value; five others lie 1%-10% below fair value. BAE and McDonalds are 10% above fair value and Diageo is 22% above. One normally aims to buy when a company is below fair value.

If investing, take advantage of pound-cost averaging by buying shares in companies with wide moats or investment trusts/ETFs over an extended period to avoid a substantial investment at the top of the market. The exception is if you are presented with one of those once in a decade opportunities: market lows such as we saw after the financial crisis of 2008/2009, or at the start of the pandemic in early 2020.

Warren Buffett is considered by many to be the best investor of all time. When he set out on his own in the mid-1950s, investors entrusted him with just $100,000 (around $1m today) of their capital. Over the course of the past 70 years, he has grown this capital into a conglomerate with just under $1trn of assets.

Buffett started investing when he was 11 years old, buying six shares of Cities Service preferred stock (three shares for himself and three for his sister) at a cost of $38 per share. He made a small profit on this investment and went on to build several other businesses.

He filed his first tax return at just 13 years of age. It was for the 1944 calendar year. He’d earned $592.50 in total, more than half of it from a paper round, the rest from investments. (He paid $7 in tax). The young businessman attended the University of Nebraska before moving to Columbia University, where he met his mentor, professor Benjamin Graham.

Graham essentially wrote the book on value investing and he also managed his own investment firm, which the young Buffett joined when he left university. Unfortunately, Graham wound up the venture a few years after the young entrepreneur joined and he was soon back home in Omaha. Soon afterwards, a group of family and friends asked Buffett to invest their savings in the stockmarket. The Buffett Partnerships, as they came to be known, earned a 31.6% annual return before fees from 1957 to 1968 compared to 9.1% for the Dow Jones Industrial Average. Buffett used a similar investment strategy to the one pioneered by Graham.

The Warren Buffett portfolio and the rise of Berkshire Hathaway

Buffett started buying shares in Berkshire Hathaway for his partners’ portfolios in the early 1960s. At the time, Berkshire was a struggling textile business. Its peers had a much lower cost base so they could undercut the firm on price. As losses mounted, the corporation’s market value fell below the value of the assets on its balance sheet.

The investor wanted Berkshire to start closing its manufacturing facilities and return the cash to its shareholders, which would have produced a fat, risk-free return for all of its shareholders. However, Berskhire’s management declined to follow his plan – so Buffett decided to take control of the business himself.

Buffett used Berkshire’s capital to buy up other firms, mainly companies in the insurance sector. In 1967, he bought Omaha-based insurer National Indemnity Company for $8.6m, giving him his first foothold in the industry. Not only was National Indemnity a well-run profitable insurer, but it also owned an investment portfolio, a valuable source of capital.

Today Berkshire Hathaway owns more than 60 subsidiaries, employing more than 300,000 people. It owns insurer Geico, battery maker Duracell, restaurant chain Dairy Queen, BNSF, one of the largest railroads in the US, and a utility giant, Berkshire Hathaway Energy – that’s all alongside a $300bn portfolio of equities.

Warren Buffett’s net wealth exceeds $100bn

At the same time, Buffett has built a huge fortune for himself. He is one of the richest people in the world (the exact position fluctuates but he’s generally in the top five) with a net worth of $112bn.

Virtually all of Warren Buffett’s net wealth is tied up in Berkshire Hathaway stock. Since he gained control of the business in 1965, the shares have returned 20.1% per annum compared to 10.5% for the S&P 500.

The top stocks in Warren Buffett’s portfolio

Buffett’s investing style can be defined by one of his best-known quotes, “Rule no. 1: Never lose money. Rule no. 2: Never forget rule one.”

Since the 1950s, the investor has always sought to find investment opportunities with a low chance of failure, but high return potential. Buffett seeks to minimise the risk of failure by sticking to companies in sectors that he knows well. “Risk comes from not knowing what you are doing,” as he puts it. He likes to own companies with an enduring competitive advantage, such as a well-known brand or substantial economies of scale, and will not pay over the odds for any business. As a value investor, he prefers to buy when other investors are selling.

In 2008 when the global financial sector was teetering on the edge of collapse, Buffett invested $5bn of Berkshire’s cash in Goldman Sachs, at extremely favourable terms which would have been impossible for an ordinary investor to access. The bet eventually yielded a profit of more than $3bn for the conglomerate. Around the same time he also ploughed cash into Dow Chemical, Bank of America and General Electric.

Despite this impressive bet, Buffett generally does not try to time the market or speculate on the price of securities. He believes that investors should approach buying a stock with the same mindset as if they were buying the entire business. He has encouraged others to “own your stocks as an investment – just like you’d own an apartment, house or a farm – look at them as a business.”

Here are the top 20 equity holdings in Berkshire Hathaway’s equity portfolio (which is managed by Buffett) as reported at the end of March according to the firm’s 13F regulatory filing:

I’ve just come back from the Berkshire Hathaway annual meeting in Omaha where Warren Buffett and Charlie Munger spoke about their latest investments. Munger famously once said that “micro is what we do, macro is what we put up with”. In other words, investment decisions should be formed by focusing on what companies are doing and what opportunities they are seeing, rather than being swayed by macroeconomic conditions.

This underpins our approach at J. Stern & Co. We look to invest in quality companies that can generate real value over the long term. This year’s stockmarket correction means many quality companies are trading at very attractive prices.

We believe that if a company can show it has the pricing power to offset inflation as well as the innovation required to grow, then it will be well-positioned for what comes next. Any weakness is as much an opportunity for us as it is for Berkshire Hathaway, or indeed any long-term investor.

Chips for future tech

Nvidia (Nasdaq: NVDA) is the leading manufacturer of high-end graphics processing units (GPUs). It’s currently trading around 40% lower than it was at the start of the year, and we capitalised on this dip to add it to our World Stars Global Equity Fund.

The company’s semiconductor chips power the high-performance computing infrastructure within data centres and are aiding the development and growing adoption of modern artificial intelligence.

Alongside its core business of gaming graphics hardware, it also has very attractive long-term opportunities in self-driving vehicles as well as augmented and virtual reality, namely the metaverse.

Enabling electrification

Amphenol (NYSE: APH) is a global leader in connectors and sensors. It embraces the type of innovation that we believe will see the company dominate over the next decade as the world adopts the “electrification of everything”. This includes more connected cars (those that communicate with systems outside the car) as well as electric vehicles, the shift to renewable power generation, the emergence of smart factories and nextgeneration communications technology.

The company has a proven record of shielding profitability by managing its costs, and it also benefits from customers leaning on larger, more established suppliers with diverse manufacturing footprints. This trend has been reinforced by the significant bottlenecks in global supply chains due to the pandemic and accentuated by the Ukraine crisis.

Looking for innovative solutions

Alcon (Zurich: ALC), the global leader in eye care that spun out of pharmaceutical company Novartis in 2019, is currently trading below its historical average valuation. Contact-lens wearers may be familiar with its products, but it also makes implantable lenses for surgical equipment for cataract surgeries.

Over the past three years the company has invested in innovation and has since launched several new products, including Vivity, a one-of-a-kind intraocular lens for cataracts that reduces glare and halo where competitors’ lenses cannot. Its first-quarter results for 2022 were testimony to this investment: both revenues and profits exceeded expectations and management raised its 2022 full-year outlook despite the uncertain macro environment, inflation, and war in Ukraine

Warren Buffett is widely considered to be one of the greatest investors of all time, and his record speaks for itself.

Shares in Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B), the corporation the investor has managed since 1965, have achieved an average compound annual gain of 20.1% over the past 56 years, nearly double the return of the US-focused S&P 500 index.

Buffett is also a relative rarity in the investment world in that he is a household name (especially in the US) thanks in part to his folksy manner and open-book style of investing.

Every year thousands of shareholders attend Berkshire’s annual meeting (AGM) where Buffett and his right-hand man, Charlie Munger, spend hours carefully answering audience questions on everything from politics to business, investing, corporate governance and the environment.

While the event is aimed primarily at Berkshire’s shareholders, considering Buffett’s experience and record there’s always something investors can learn from this highly successful individual.

There’s a difference between the stockmarket and the underlying business

If I had to pick out just one lesson from this year’s AGM, I’d have to pick Buffett’s comments on market timing.

Responding to an audience question, he said, “I don’t think we’ve ever made a decision where either one of us has either said or been thinking we should buy or sell based on what the market is going to do, or for that matter, on what the economy’s going to do. We don’t know.”

Timing the market is usually a fool’s errand; most research shows it’s almost impossible to do and any investor who’s been around for a few years will know that all too well.

When investing for the long term, it’s not whether you buy a stock at 100p or 110p that makes the difference, it’s how long you hold that stock for and how much value the business creates in the meantime (this applies to funds as well).

Over the past 70 years, (Buffett first started investing money for others in the mid-1950s) Buffett has seen recessions, depressions, wars, periods of inflation, central bank tightening cycles, monetary easing cycles, market crashes, market bubbles and civil unrest.

You name it, he’s been through it. Yet he’s never moved away from his basic strategy of buying high-quality companies when they look cheap, and avoiding them when they look expensive.

Since the beginning of his career Buffett has invested following the principle that a share is a piece of a business, not a gambling chip in a casino. He looks through the market and focuses on a company’s fundamentals to determine how much the underlying business is worth. He’s not bothered by what the rest of the market is doing.

The simple principle at the core of Buffett’s strategy

It might seem simple, but this differentiator lies at the heart of Buffett’s strategy: he buys businesses, not stocks. He is looking to buy businesses on the cheap when the market offers him the chance. He is not trying to outsmart the market and predict the future.

This is a strategy any investor can follow. In fact, Buffett believes it’s something even children can pick up.

“We’ve been reasonably good at figuring out when we were getting enough for our money. And we had no idea when we bought anything, but we always hoped it would be down for a while so we could buy more. ... I mean, that stuff, you could learn in fourth grade,” he told his audience last weekend.

The approach has cost him some opportunities, but it has also saved Buffett from making plenty of mistakes, and that’s far more important.

It’s very easy to lose money. It’s far harder to make it, a fact Buffett knows all too well. So rather than trying to guess what the future holds for the market, he sticks to what he knows – buying businesses at attractive prices.

Considering his record, it’s hard to argue against this approach.

Disclosure: Rupert Hargreaves owns shares in Berkshire Hathaway.

Corporate jargon is an irritating fact of life. But it can also damage your investment returns, if a new study is to be believed, reports John Authers in Bloomberg. Analysts at investment bank Nomura looked at the language used by top executives at America’s biggest listed companies (those in the Russell 1000 index) in conference calls discussing their annual and quarterly results, going back to 2014. They used a readability tool to rate the communications for complexity (readability tools analyse aspects such as sentence length and choice of words). They found a strong correlation between clarity and returns: share prices of the stocks whose executives used the clearest language in calls far outperformed those who waffled or used lots of impenetrable jargon.

This makes logical sense. If someone can’t explain their business strategy clearly, it usually means one of two things: either they don’t know what they’re doing, or they do know what they’re doing, and they’re trying to hide it from you. Neither is a good prospect for an investor. What’s more, the analysis backs up previous research into the relationship between corporate communications and earnings. For example, one study published in the Research in International Business and Finance journal in 2016, found that French companies that used more complex language in earnings reports also were more inclined to use debatable accounting techniques to make their results look better than they really were.

Lessons for investors

There are many examples of skilled communicators who have done well for their investors over the years. Warren Buffett’s annual letters to Berkshire Hathaway shareholders are perhaps the most-scrutinised corporate documents in investment history. In his own shareholder letters, Amazon founder Jeff Bezos also proved highly skilled at boiling down a complex business to some key strategic points. Here in the UK, fund manager Terry Smith is admired for his forthright views, while a large part of Simon Wolfson’s success as head of retailer Next is his commitment to explaining very clearly what the company is doing and why.

Yet you don’t need to hunt down CEOs or managers with exemplary communication skills. Here’s a simple test to carry out on your own portfolio right now. Look at your holdings. Are you confident that you could clearly explain to another interested investor what your reasoning is for owning each fund or stock? Try to sum it up in a sentence for each one. If you can’t, then maybe it’s a sign that it shouldn’t be in there – or at the very least, that you need to do more homework. Give it a go – I suspect you might be surprised.

The war on Covid-19 has proved remarkably expensive. The US federal deficit last year ran to $3.4trn. That’s nearly 95% of Washington’s total tax take. How to foot the bill? So far, President Joe Biden’s administration has only proposed tinkering with the current tax system. The White House has called for the maximum tax rates on income, corporate and capital gains to rise (capital gains tax might also become payable on estates). UK prime minister Boris Johnson is considering a reduction in the tax benefits enjoyed by pensions. Given Britain’s poor savings record, a raid on retirement plans appears ill-advised.

Rich Americans are expert at avoiding income taxes. Investigative journalists at ProPublica have revealed that several of America’s richest citizens – including Jeff Bezos, Elon Musk, George Soros and Carl Icahn – didn’t pay federal income tax in some years. In 2015, some 14,000 US taxpayers paid more income tax than Berkshire Hathaway’s boss Warren Buffett. The Sage of Omaha enjoys a relatively low income-tax bill because he seldom realises capital gains and Berkshire doesn’t pay a dividend. Corporate America is equally adept at minimising its tax liabilities. The five most valuable US companies – Microsoft, Apple, Facebook, Alphabet and Amazon – pay 15% of their profit in taxes, nearly a third less than last year’s statutory US corporate tax rate of 21%. It’s time to consider fresh sources of government revenue. Here are some possible new taxes to do the trick:

Wealth Tax

Billionaires might find it harder to avoid a wealth tax than income tax. Besides reducing inequality, an annual wealth levy, which already exists in some form in prosperous economies including Switzerland and Norway, could replace capital gains and the hugely unpopular estate tax. The richest 25 Americans, from Bezos to eBay’s founder Pierre Omidyar, are worth $1.8trn dollars, according to Forbes. A 2% tariff on their wealth would raise around $36bn, many multiples of what they pay in income tax. But critics claim such a levy would discourage enterprise and hurt small businesses.

Leverage Tax

Financial analyst Martin Hutchinson has mooted a tax on corporate leverage. Hutchinson argues that leverage is a source of financial instability. In recent years, companies have taken advantage of easy money to get further and further into debt. A leverage tax would reduce debt-funded buybacks and other types of financial engineering. Instead of “de-equitising”, firms would have an incentive to replace debt with equity. AT&T is currently the most leveraged non-financial US corporation with total liabilities close to $350bn. If those liabilities were taxed at 2%, the phone company would pay nearly $7bn more.

Monopoly Tax

As Adam Smith pointed out, a dynamic economy requires free competition. Yet, as Jonathan Tepper shows in his recent book, The Myth of Capitalism, the US economy has become dominated by corporate behemoths. Research suggests that companies with dominant market positions are more profitable, but tend to invest less.

It used to be the job of antitrust regulators to dismantle monopolies, but lately they have sat on their hands. A profits tax based on market share would do the job more efficiently while raising tons of cash. As Tepper writes, “If we have progressive income tax because the marginal utility of money is lower for the very wealthy, why should we not tax corporations similarly?”. Facebook currently pays around 13% of its profit in taxes. If the social-network giant’s tax rate was based on its global market share, its corporate rate would increase more than fivefold. Society would benefit if the monopoly rents currently enjoyed by Facebook, Google and other tech giants went into the public purse.

Green Sales Tax

A key weakness of capitalism is that those responsible for damaging the environment often avoid paying up. The British-born economist and Nobel laureate Ronald Coase suggested long ago that the state should charge companies for “externalities”, such as pollution. An alternative approach would be to include environmental costs in a sales tax. Such a tax would mimic the “sin taxes” already added to tobacco and petrol. Thus, diesel-powered cars would attract a higher sales tax than electric vehicles, and the tax on intensively reared beef would be higher than grass-fed beef. The level of the green sales tax could be linked to the amount of carbon dioxide emitted in production.

Since externalities are hard to measure, such a tax would be administratively complex. Besides, there’s a danger that any new tax will have unforeseen consequences. When William of Orange introduced the Window Tax in 1696 to pay for Britain’s war with France, homeowners bricked up their windows. After France introduced a wealth tax in the 1980s, thousands of millionaires fled the country. President Emmanuel Macron abolished the tax in 2017.

Political realities mean few, if any, of these proposed new taxes will see the light of day. Instead, politicians will resort to the oldest tax of all, a tax that requires neither legislation nor the assent of the people. Since ancient times, states have met the costs of war by debasing their currencies. Little has changed in the interim. Today, central banks are busy printing money to buy government debt. An inflation tax is in the offing. Even the canny Buffett will have trouble escaping its reach.

A longer version of this article was first published on breakingviews.com.

We are in the middle of an unprecedented technology boom, especially in the US, with the tech-heavy Nasdaq Composite index doubling in just over two years. Of course, this is not entirely irrational. For example, some companies, notably Facebook, Google and Amazon, have managed to deliver on the promises made over a decade ago.

Low long-term interest rates have also increased the value of future profits, while a case can be made that the pandemic has accelerated genuine long-term changes in the way that we shop, consume goods and services, and work.

Nevertheless, several stocks have surged so far that it seems investors are willing to throw lots of money at anything that looks vaguely plausible. Perhaps the most egregious example is data company Snowflake (NYSE: SNOW), the largest initial public offering (IPO) of 2020.

When its backers announced that they were taking it public, brokers expected it to be priced at $75 a share. However, demand was so great in the run-up to the listing that the shares were ultimately priced at $120. On its first day of trading it opened at double that amount. The price then continued to rocket, gaining 50% to a peak of $375 last month.

Snowflake’s sales doubled in 2020

Snowflake is a cloud-computing company. It makes most of its money from software that allows companies to store and analyse large data sets remotely. The idea is that in a world where everyone is working from home, or small offices, such storage and analytic services will be in demand.

Sales more than doubled last year and are expected to double again in 2021 – and again in 2022. Snowflake is also notable for having attracted initial funding from Berkshire Hathaway, the holding company run by the famous US investor Warren Buffett.

This all certainly sounds compelling, but if you look a bit more closely, the stock appears much less attractive. While cloud computing is a genuinely big investment theme, Snowflake faces strong competition from a range of operators, including large, established players such as Amazon (which dominates the market through Amazon Web Services).

Not only has Snowflake failed to make money so far, but it will also have an uphill struggle to justify a valuation of over 200 times 2021 sales. Warren Buffett’s endorsement looks far less impressive when you remember that he made his reputation by investing in cash-generating companies in strong, established sectors, not moonshot technology companies.

It now appears that even Snowflake’s cheerleaders are beginning to tire of the company, with the price melting down by 20% in recent weeks to the current level of $306. Still, I would advise you to wait just a little longer, shorting the stock at £7 per $1 when it falls below $280. In that case, I suggest you cover your position if the share price rises above $420, which gives you a potential downside of £980.

Trading techniques: the Super Bowl indicator

Last Sunday saw the Tampa Bay Buccaneers beat the Kansas City Chiefs in the 55th Super Bowl. Traders who believe in the Super Bowl indicator will be pleased.

This is because the indicator suggests that the US stockmarket tends to perform better after a team from one of the two key leagues, the National Football Conference (NFC), beats a team from the other, the American Football Conference (AFC) in the big game. Since Tampa Bay is in the NFC, this should be good news for equities.

There does seem to be something to this theory. According to Russ Mould of AJ Bell, on the 27 occasions teams from the NFC won, the stockmarket returned an average of 10.5% in the following year – but an average of only 6.9% a year after the 27 AFC victories.

However, Mould points out that this may be because the AFC teams were dominant during the 1970s when stagflation depressed stocks, while teams from the NFC won 13 consecutive Super Bowls during the bull markets of the late 1980s and 1990s.

What’s more, those who have placed their trust in Super Bowl theory have done badly over the last 20 years, with the market returning 9.17% on average after AFC victories, compared with only 2.76% after NFC wins. The main lesson is to ignore theories and indicators without an underlying financial rationale.

How my tips have fared

Four of my five long tips have gained in the past fortnight. Media group ITV went up from 102p to 108p and transport group National Express rose from 244p to 301p.

Pub group Mitchells & Butlers increased from 277p to 348p, while cruise-ship company Norwegian Cruise Lines climbed from $23.97 to $25.01. However, while building company Bellway advanced from 2,803p to 3,114p, it briefly fell below the stop-loss level of 2,750p, so you would have had to close it there, taking profits of £780. Still, even excluding the profits on Bellway, my four longs are making a total net profit of £5,610.

The short tips were more of a mixed bag. Online insurance broker eHealth slipped from $82.97 to $57.37. Electric lorry-maker Nikola advanced from $20.74 to $23.50. Online furniture retailer Wayfair fell from $294 to $289. Social-media network Twitter increased from $48 to $58, which meant that you would have covered your position at $56.20 for a loss of £980.

Online grocer Ocado fell from 2,800p to 2,688p, and food-delivery platform DoorDash decreased from $191 to $177. GameStop hasn’t yet fallen below $50, the level at which I suggested you start shorting it. Overall, excluding Twitter, my short tips are making a profit of £1,485.

The closure of Bellway and Twitter leaves me with four long tips (ITV, National Express, Mitchells & Butlers and Norwegian Cruise Line), and five shorts (eHealth, Nikola, Wayfair, Ocado and DoorDash), with GameStop and Snowflake yet to be triggered. I suggest you close your Wayfair short, since it is losing money after more than six months, taking losses of £161. Raise the stop- losses on National Express and Mitchells & Butlers to 275p and 300p respectively.

Not for the first time, Warren Buffett is swimming against the tide, says Mike Bird in The Wall Street Journal. Early this month his Berkshire Hathaway group spent $6bn acquiring stakes in five Japanese trading houses. Yet data shows that other foreigners have been souring on the world’s third-biggest economy.

However, Shinzo Abe, who took office in 2012 and has just resigned, leaves Japan’s markets better than he found them, says The Economist. Lower corporate taxes and a depreciating yen gave a much-needed boost to shaky corporate profits, while reforms to corporate governance have made Japanese managers more responsive to the needs of shareholders. The Topix index has gained more than 82% since he took office. Reforms in Japanese markets have been overshadowed by the dominance of US-listed tech stocks, says Andrew Bary in Barron’s. The country is “more like Germany than the US”, explains Masakazu Takeda of Sparx Asset Management. Japan’s real speciality is its “high-quality industrial businesses”, such as carmaker Toyota and air conditioning supplier Daikin Industries.

The dominance of these sectors has fed a perception that Japan is not a “sexy” investment, Nicholas Weindling of the JPMorgan Japanese investment trust tells Jeff Prestridge in The Mail on Sunday. But there are plenty of exciting growth companies. GMO Payment Gateway, an electronic payment specialist, and robotics business Keyence offer exposure to key secular growth trends. Moreover, on a cyclically adjusted price/earnings ratio of 19.4 the market looks reasonably valued. For British income seekers weary of the FTSE dividend axe, a 2.4% average dividend yield backed up by robust balance sheets looks especially appealing.

Gold – and, more specifically, gold shares – received an unexpected endorsement this week from the most unlikely of sources.

Warren Buffett’s Berkshire Hathaway announced it had bought roughly half a billion dollars’ worth of stock (21 million shares) in Barrick Gold (NYSE: GOLD).

The reason so many are so excited is that Buffet has always been so outspoken against gold. Yet now, perhaps the most successful investor that ever lived has gone long.

Let’s delve a little deeper. We’ll start with Buffett's long stated dislike of gold.

Buffett doesn’t like gold, but he understands it

“It gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”

Gold, as we have stated many times, is a store of wealth. It is inert and useless. It’s very uselessness is why it makes it such a good store of wealth – such good money. But that’s the reason Buffett dislikes it: he likes “investing in America”; in businesses that are active; he doesn’t like inactivity.

“The problem with commodities is that you are betting on what someone else would pay for them in six months. The commodity itself isn’t going to do anything for you… it is an entirely different game to buy a lump of something and hope that somebody else pays you more for that lump two years from now than it is to buy something that you expect to produce income for you over time.”

“I have no views as to where it will be, but the one thing I can tell you is it won’t do anything between now and then except look at you. Whereas, you know, Coca-Cola will be making money, and I think Wells Fargo will be making a lot of money and there will be a lot — and it’s a lot — it’s a lot better to have a goose that keeps laying eggs than a goose that just sits there and eats insurance and storage and a few things like that.”

I’m a gold diehard, as you know. And this argument against gold is one that frustrates many diehards, particularly when it comes from a position of ignorance. It’s one, however, that I have some sympathy with. Gold’s purpose is to store what you have, to hedge against inflation, debasement of money, and so on. Buffett’s never been interested in that. He is interested in businesses, in people, in growing his wealth. No wonder he doesn’t like gold.

And his position does not stem from a position of ignorance. He grew up in a pro-gold household. His father, the congressman Howard Buffett, championed a return to a gold standard and repeatedly spoke out about it. “Human freedom rests on gold redeemable money,” he said. “Paper systems end in collapse… Taxpayers must regain their right to obtain gold in exchange for the fruits of their labour.”

Who knows? Warren Buffett may feel the same way as to America’s money. That doesn’t mean he likes gold as an investment. “Gold is a way of going long on fear, and it has been a pretty good way of going long on fear from time to time”, he said. “But you really have to hope people become more afraid in a year or two years than they are now. And if they become more afraid you make money; if they become less afraid you lose money, but the gold itself doesn’t produce anything.”

Buffett may not like gold, but for sure he understands it.

Gold-mining stocks could be in the early stages of a bull market

It’s worth stressing at this point, that Berkshire Hathaway has not bought gold. It has bought a dividend-paying, gold-mining company that happens to have the ticker symbol GOLD. So Buffett’s “lack of utility” complaint is satisfied.

Barrick, once the world’s largest gold producer, used to be a laughing stock. Its hedging policy meant that in the 2000s it was selling gold for around $300 an ounce when the market price was more than double that. As a result the stock became a perennial underperformer.

Even today, its shares are still trading at around the same price as they were in 2006, when gold was a third of the price it is today. But Barrick, under the management of CEO Mark Bristow, who effectively took Barrick over via the much slicker operation Randgold Resources, is a different beast altogether and a better-run company.

It is also worth noting that, although Berkshire’s buying and selling is attributed to Warren Buffett, he is now 90 and his partner Charlie Munger (who is even less of a gold fan than Buffett) is 96. They do not play the same role in the Berkshire strategy that they once did. There is a good chance that the purchase came from either one of their lieutenants, Ted Weschler or Todd Combs, who each manage about $15bn of Berkshire’s equity portfolio and, especially, the sub-$1bn investments such as this, that for Berkshire are tiny. The Barrick investment amounts to one thousandth of Berkshire Hathaway’s $500bn market cap.

Nevertheless the change of direction is a big deal for gold and gold miners. The sector, tiny relative to the stock and bond markets, will be taken more seriously by big players. There are goodness knows how many Buffett trackers and copycat vehicles that will now follow. Gold miners get more coverage, more analysis, more publicity. And with the increased analysis, many will discover better value further down the food chain, and so new money will work its way down.

All in all, for gold mining investors, this is a good thing. At the same time, also significantly, Berkshire announced reduced exposure in financial stocks, and a complete exit of airline and restaurant stocks.

After some 15 years of bear market, the ratio between gold and gold miners has finally turned up.

That looks like a multi-year double bottom to me. We could be in the early stages of a secular bull market for gold-mining stocks. Hang on to your hats. And, more importantly, your positions.

Daylight Robbery – How Tax Shaped The Past And Will Change The Future is available at Amazon and all good bookstores with the audiobook, read by Dominic, on Audible and elsewhere.

On the walls of Berkshire Hathaway’s offices, framed front pages from days of market panic, such as the 1929 crash, “serve as a reminder not to succumb to the passions of the moment”, says The New Yorker. Warren Buffett’s “ability to divorce himself from emotion” has always been part of his genius as an investor. And he hasn’t lost his head now. But he does seem to have lost his edge and is the first to admit it.

Asked last year which would be the better investment to put in a child’s account – a share in Berkshire Hathaway or a share in an S&P 500 tracker fund – Buffett didn’t hesitate, “I think the financial result would be very close to the same”. The statement, notes the FT, was made “without qualification”. Still, it’s hard not to wonder if Buffett, even at 89, is underplaying his ambitions. After all, he’s a PR genius too – “cultivating an aw-shucks, Midwest-wholesome image of a man who has triumphed in the long game by practising a simpler, purer version of capitalism”.

A schoolboy out-earns his teachers

Buffett’s “plain-dealer persona” is integral to the Berkshire enterprise: “I buy expensive suits – they just look cheap on me”, is one of his famous quips. The business continues to occupy “a single floor in an unexceptional office tower in Omaha that bears another company’s name”. Buffett himself lives in “the same house he bought in the 1950s” and still works at the desk used by his father, a stockbroker turned Republican congressman. “Both Buffett and Berkshire are superficially unchanged.” Yet their investment formula has shifted considerably down the years. The man who warned in 2003 that derivatives were “weapons of mass destruction” made good use of them himself after the crisis. Indeed, until this latest blip, “the degree to which Buffett has outwitted successive generations of Wall Street rivals almost defies comprehension”.

Buffett’s financial career began officially at the age of 14 when he filed his first tax return having saved $1,000 from early ventures including a paper round, says The Observer. He had bought his first shares aged 11. Born in 1930, his early years were shaped by the Great Depression and “his corrosive relationship with his mother”, who all the children were terrified of. An unusual boy, “obsessed with numerical calculation and arcane research”, Buffett would “compare the lifespans of those who composed hymns” at church on Sundays, says The New York Times. By the time he finished high school his ventures had come to include pinball machines and he was earning “more money than his teachers”.

The great investor learns how to live

A key turning point came when, on rejection by Harvard Business School, he went to Columbia instead. A professor there, Benjamin Graham, the so-called “father” of value investing, became Buffett’s mentor and role model, says The New Yorker. From Graham, Buffett – who put in a short stint on Wall Street before returning to Nebraska to marry and set up shop on his own – learned the idea of buying “cigar butts”: companies on their last legs, but so undervalued they’re worth “one last puff”. But it was his partnership with Charlie Munger – the pair first met in 1959 – that was “instrumental in moving Buffett from buying bad businesses at cheap prices to buying great businesses – most famously, Coca-Cola – for reasonable prices”, a move that was the foundation of his great fortune.

Buffett’s children later described him during those years as “the disengaged, silent presence, feet up in his stringy bathrobe, eyes fixed on The Wall Street Journal at the breakfast table”. Cerebral and inward-looking, he “attributes much of his later success to taking a Dale Carnegie public-speaking course as a young man”, says The New Yorker, and much of his “evolution as a person” to his late wife, Susan, who pushed him to give more of his money away during his lifetime. “Buffett was born to be great at investing. He had to work really hard to be good at living.”

For all the worries about the spread of coronavirus, investors should ignore scary headlines, says Warren Buffett, America’s best-known investor. “Something else will be front and centre, six months from now, a year from now,” he tells Becky Quick on CNBC.

In his latest annual letter to shareholders in Berkshire Hathaway, Buffett’s investment vehicle, the 89-year-old writes that when evaluating how to respond to news events, or sharp falls in stockmarkets, “the real question is: ‘Has the ten-year or 20-year outlook for American businesses changed in the last 24 or 48 hours?’.” Given that you wouldn’t buy or sell your own business simply “on today’s headlines”, why sell shares in good firms?

Buffett also favours equities over bonds. “If something close to current rates should prevail over the coming decades and if corporate tax rates also remain near the low level businesses now enjoy, it is almost certain that equities will over time perform far better than long-term, fixed-rate debt instruments.”

When asked for his views on the 2020 US presidential election, Buffett – who describes himself as a Democrat, tells Quick that while he agrees with Democratic candidate Bernie Sanders that “we ought to do better by the people who get left behind by our capitalist system, I don’t think we should kill the capitalist system in the process.” Instead, he says, he would support fellow billionaire Mike Bloomberg (pictured).

When Amazon, Berkshire Hathaway and JPMorgan Chase announced a healthcare joint venture for their US employees earlier this year to tackle soaring costs, it wiped billions from the market value of health insurers. The trio offered scant detail, says the Financial Times. Yet the mighty combo of an e-commerce giant, Buffett's investment conglomerate, and America's largest bank by asset value was seen as a huge threat to one of America's biggest industries.

Starting a healthcare revolution

The appointment of Dr Atul Gawande to lead the "ABC coalition" was in some ways a relief for healthcare's vested interests, however. Gawande is that rare thing: a surgeon-journalist. He teaches at Harvard Medical School and writes for The New Yorker. He has gained "national recognition" as a best-selling author chronicling the state of America's "broken" medical system. But he has never run a major business.

For an industry running scared about a big disruption, that seems like a stay of execution. Gawande's arrival suggests the new entity "may be focused more on experimenting with technology and data" than on "the more radical step of launching a managed-care provider that would directly compete with the biggest US healthcare players".

Industry insiders have been quick to highlight Gawande's lack of experience, says Forbes. They don't seem to understand that "Jeff Bezos, Warren Buffett and Jamie Dimon did not hire a big-thinking industry outsider to set up a conventional insurance system or haggle with doctors and hospitals over prices". Gawande was selected to "change how healthcare is structured, paid for and provided". His job is "to make traditional health plans obsolete, and to create a bold new future for American healthcare".

It would be hard to find anyone better qualified, says The Independent. Born in New York in 1965 to immigrant Indian doctors, Gawande initially "toyed with a political career", taking a degree in biology and political science at Stanford, followed by a Rhodes scholarship at Oxford, where he read politics, philosophy and economics. Returning to the US, he went to Harvard to study medicine in 1990, but then ditched the course to become head of health and social policy to Bill Clinton, later following him to the White House as a senior adviser.

From politics to medicine

To the relief of Gawande's parents, he eventually completed his medical studies and began practising: "I didn't like the idea of my future being dependent on politics". Yet it is for his writing that he is most admired. Encouraged by his friend Malcolm Gladwell, Gawande "quickly garnered acclaim and awards for his elegant essays on public health and medicine", says the FT.

Four subsequent books have expanded his reach. His third, The Checklist Manifesto, became "a manual for medical reform". Hospitals following his basic advice "found their death rates nearly halved". It was a 2009 article questioning the extraordinarily high costs of the US medical system that first attracted the attention of Warren Buffett and his business partner Charlie Munger, says Bloomberg. "Munger thought the article so socially useful that he mailed Gawande a $20,000 cheque."

"A tall, gangly figure", Gawande is "softly spoken, modest, contained", says The Independent. He has a ferocious work ethic, getting his writing done in the 45 minutes between surgical cases. There will be little time for that now he is writing a blueprint for mass reform, says Forbes. "The good news for healthcare's incumbents is that the change process will likely take five to ten years The bad news is that the clock just started ticking."

The S&P 500 index is one of the most important financial indices in the world. It is widely regarded as being the best single gauge of large-cap US equity performance, and a staggering $15.6 trillion is indexed or benchmarked to the index. To put that figure into perspective, UK GDP is only around $3.1 trillion.

First created in 1975, the S&P 500 today includes 500 leading companies listed in the US. It covers approximately 80% of available market capitalization across US equity markets, which is why it is so widely tracked and followed.

S&P Dow Jones Indices, a subsidiary of S&P Global, Inc, determines which companies get added to the index.

The index is what is known as a market-capitalization-weighted stock market index. That means each company is weighted in the index according to its size. For example, a company with a $1 trillion market capitalization will have a more significant impact on the index's daily performance than one with a $500 billion market capitalization.

To be included, a company needs to have a market capitalization of at least $12.7 billion, be highly liquid (easily tradable), profitable in its most recent quarter's earnings and must have achieved positive earnings over the past four quarters.

S&P futures

As the S&P 500 is an index, investors can't really buy it directly. Investors can track the index through a fund, such as the SPDR S&P 500 ETF trust (more on that later), which replicates the performance of the index by acquiring the underlying securities.

Another option is to acquire S&P 500 futures. These are a type of derivative contract, providing buyers with an investment price based on the expectation of the S&P 500's future value.

These so-called E-mini contracts can be traded through the Chicago Mercantile Exchange and, unlike stocks listed in the S&P 500, can be traded at all hours of the day.

However, it is important to remember that S&P 500 futures are derivative instruments and do not represent any direct interest in the underlying securities.

Stocks in the S&P 500

Overall, there are actually 503 stocks in the S&P 500. This is because three of the 500 listed companies, or ‘constituents’, have different share classes, which have to be included in the index.

Of the 503 stocks in the S&P 500, the largest company has a market capitalization of $2.35 billion. That title falls to the tech giant Apple.

The second and third largest stocks in the S&P 500 are Microsoft and Amazon.com, respectively. They are followed by Nividia Corp, Tesla, Berkshire Hathaway and two classes of shares in Google's parent company Alphabet.

The largest constituent, Apple, has a 6.6% weighting in the index. That means Apple has by far the largest impact on the index on a day-to-day basis. As such, if Apple does well on any trading day t it's likely the S&P 500 will do so as well.

The top 10 stocks in the S&P 500 have a weighting of 25.6% in the index.

S&P 500 index funds

An index fund is a type of mutual fund or exchange traded fund (ETF) with a portfolio constructed to match the components of a financial market index.

S&P 500 index funds are incredibly widespread and contain a vast volume of assets because this is one of the most crucial stock indices in the world. As noted above, index funds are one of the only ways investors can own the S&P 500.

Investors could attempt to build their own index fund and mimic the performance of the S&P 500, but doing so would be incredibly complicated, time-consuming and expensive.

That's why investors often choose S&P 500 index funds. These tend to be much cheaper, only charging a few basis points a year plus management fees, and are incredibly easy to buy and sell.

SPY stock

The largest S&P 500 tracker fund is SPY stock. The exchange traded fund was established in January 1993, is regarded as the first ETF to be listed, and remains one of the most actively traded ETFs in the world.

At the end of March, the ETF managed $362.41 billion of assets, with an expense ratio of 0.0945%.

That's one of the lowest expense ratios of any ETF on the market. When it first started life, the ETF managed just $6.5 million of assets.

As you would expect, the SPY stock holdings are almost identical to those of the S&P 500.

What's more, SPY stock is intended to be one-tenth of the S&P 500 index. So, if the index were trading at 3000, then one SPY stock should trade at $300.

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What is it that makes great business leaders stand out from the crowd? Two American small-cap investors think they have found the answer, reports Richard Beddard.

It's the Holy Grail of investment: a way to uncover great companies before they achieve greatness, and the share price gains that go with it. Now two smaller-company investors in the US Sean Iddings and Ian Cassel think they've found the secret. The idea comes from Charlie Munger, who runs US investment company Berkshire Hathaway with the slightly-more-famous Warren Buffett. Buffett and Munger favour companies with sustainable competitive advantages those that add value in a way that cannot be easily copied by rivals. It's these unique advantages known as a company's "moat" that determine how long it will remain a good investment. But what determines the strength of a company's moat? According to Iddings and Cassel, it's all about good leadership or as they put it, intelligent fanaticism.

Here's their definition of an "intelligent fanatic", from the cover of their book, Intelligent Fanatics Project: How Great Leaders Build Sustainable Businesses (2016): "A CEO or management team with large ideas and fanatical drive to build their moat. Willing and able to think and act unconventionally. A learning machine that adapts to constant change. Focused on acquiring the best talent. Able to create a sustainable corporate culture and incentivise their operations for continual progress. Their time horizon is in five- or ten-year increments, not quarterly, and they invest in their businesses accordingly. They own large portions of their business. Regardless of the industry, they are able to create a moat that competitors fear."

In the book, Iddings and Cassel look at eight leaders one Brazilian, one British and six from the US who founded businesses or turned them around, and grew them over decades into firms that dominated their markets. By studying great leaders from the past, the authors aim to distil characteristics that can be used to identify at an early stage entrepreneurs who can outsmart rivals and build businesses that redefine their industries. Their point is that culture is a firm's one true source of competitive advantage the ultimate moat, if you will and that the most competitive corporate cultures those that empower and motivate staff to delight generations of customers are fostered by intelligent fanatics. Examples in the book include Simon Marks, the son of Marks & Spencer founder Michael Marks, who fought off the challenge of FW Woolworth to establish the superstore concept in the UK. Or Herb Kelleher, who invented a low-cost business model for Southwest Airlines, the tiny Texan outfit he co-founded and ran from 1971 to 2001. It is still America's leading low-cost airline despite having spawned many imitators.

The rewards for correctly identifying a culture shaped by intelligent fanatics can be huge. The estimated shareholder returns attributable to the careers of those studied by Iddings and Cassel range from 16% a year during Marks' 37-year tenure from 1927 to 1964, to the 40% achieved by discount shopping pioneer Sol Price at FedMart and then at Price Club from 1954 to 1993. All eight leaders achieved high returns for at least 30 years, but even over 20 years, the numbers involved compound to mighty totals at 16% a year, £10,000 becomes nearly £200,000; at 40%, it turns into over £8m.

Finding fanatics in the UK

So how can you analyse corporate culture? It's not easy for outsiders to do, except perhaps in hindsight, once the business-school case studies have already been written. However, by reading annual reports, meeting companies as shareholders, and interacting with them as customers, competitors and suppliers, investors can build an impression of the culture within firms. For example, companies often devote more space in communications with shareholders to describing their performance than to explaining how they achieve it. Some are afraid to shed light on their competitive advantages in case their rivals copy them. This can suggest their moat is narrow, and easy to duplicate. Companies with a solid moat ought to be more forthcoming. A strong culture is harder to replicate than a good product, and if it is allied to a profitable business, then it makes sense to boast about it. A company that tells its customers and shareholders why it's so good will attract more of them. It will also deter potential rivals, if they decide that competing head-on would end in failure.

Also, you can take your time. You don't need to invest right at the start of an intelligent fanatic's career to become wealthy riding their coat-tails. Nor, given the returns on offer, do you need to identify many to win. Below, I've looked at some promising candidates for UK investors. Executives at these firms share many of the characteristics identified by the Intelligent Fanatics Project. Better yet, their firms are highly profitable, well financed, and have already grown significantly. In what follows, remember that enterprise value is a measure of the firm's market value (including both debt and equity) and the debt-adjusted price/earnings ratio compares that value to its most recent adjusted profit. But if any of these companies keep earning outsized returns for decades, current valuations will be but historical footnotes.

Philip Meeson, Dart (LSE: DTG)

Enterprise value: £1,075m

Debt-adjusted p/e: 11

Iddings and Cassel found that, with the exception of Marks, all their intelligent fanatics were industry outsiders. Industry dogma, they say, can hold businesses back. When Philip Meeson, executive chairman of logistics and airline group Dart, left the RAF to set up an aerobatics team and run a business importing second-hand Citroen 2CVs, he had plenty of experience of flying, but little of airlines. He eventually bought a business shipping flowers from the Channel Islands, which became Dart in 1991.

Dart is still involved in road freight, but most of its revenue and profit comes from Jet2.com, an airline launched in 2002, and Jet2holidays, a package-tour company launched in 2007. Dart's big idea was to give families in the north of England comfortable holiday flights at convenient times. The young airline doubtless learned much from Kelleher's example just as Southwest honed its business model in Texas before expanding nationwide, Dart has only just extended into southern England Jet2.com flew its first flight from Stansted this year.

Like all the intelligent fanatics, Meeson and his colleagues have developed a unique customer-focused business. It competes with arch-discounters such as Ryanair on service, and with package-tour operators on price. Although it's no longer a small company, it's gearing up for the next phase of expansion with major investment in new aircraft.

Matthew Ingle, Howdens Joinery (LSE: HWDN)

Enterprise value: £2,990m

Debt-adjusted p/e: 15

Howdens Joinery was founded by chief executive Matthew Ingle in 1995 and now has 650 depots across the UK. The firm is not afraid to boast about its competitive advantage it is "proud to be trade-only", with a focus on small builders. It adds value for its customers in several ways: it keeps everything they need in stock; it offers them credit, so they can finish a job before they pay for the materials; and it keeps its prices confidential, so the builder can decide how much of a mark-up to charge.

Howdens exhibits another characteristic of the intelligent-fanatics model: the clever use of generous incentives to attract the best staff and help them flourish. At Howdens, depot managers receive a share of the depot profit, which, the company says, can be "life changing". It also gives managers the autonomy they need to earn their bonuses. Shareholders may rightly wonder how many more depots Howdens can open before the UK is saturated. But while that may happen within a decade, it would be premature to write the Howdens team off yet. Experimentation is another characteristic of intelligent fanatics they are never complacent and Howdens has been experimenting with stores in Europe for ten years.

Andy Walters, Quartix (LSE: QTX)

Enterprise value: £180m

Debt-adjusted p/e: 34

Complexity breeds bureaucracy and sclerosis. A good sign that an intelligent fanatic is running a company is a preference for simplicity, say Iddings and Cassel. One reason Southwest Airlines could cut costs so effectively was because it only used one kind of plane, reducing bills for maintenance and pilot training. That brings us to our next company, Quartix. Some of the builders installing Howdens kitchens will have Quartix telematics systems in their white vans. Quartix rents its systems to firms with small fleets of vehicles. These companies don't have big budgets, or sophisticated needs. They just want to know that staff are not moonlighting or idling, and that they are driving safely between jobs.

In 2001, Andy Walters realised that this was a huge market that could be supplied with a generic product. The trick was to keep costs down, and to remove barriers such as up-front installation charges, or multi-year contracts, that deter small firms from using telematics. The company invests heavily in the product and systems, but only if new developments will benefit at least 80% of customers. Walters, who works from a serviced office in Cambridge and pays himself a very modest salary, explains clearly and simply how the company makes money, and disdains the technical jargon used by the industry to label his products. To Walters, they're not telematics systems, they're vehicle trackers. Indeed, Quartix's devices are probably the easiest bit of the company for a rival to copy. What would be far harder to replicate is its direct-marketing database and its frugal ethos.

John Kearon, System1 (LSE: SYS1)

Enterprise value: £100m

Debt-adjusted p/e: 19

You have to be iconoclastic to upend an industry, say Iddings and Cassel, but you risk losing your customers if you run too far ahead of them. The granddaddy of intelligent fanatics, John H Patterson of National Cash Register (founded in 1884), introduced shopping tills to the world. The technology was too much for American saloon keepers to take in one go, so Patterson stayed a short distance ahead, educating customers via a highly trained salesforce as NCR rolled out improvements to the cash registers.

John Kearon, System1's founder and chief executive, has faced and overcome a similar challenge. He believes the market-research industry has been barking up the wrong tree measuring the persuasiveness of marketing doesn't necessarily predict how effective it will be. Instead, building on the work of behavioural scientists, he believes the extent to which brands and advertisements sway our emotions better predicts their power. System1 formerly BrainJuicer pioneered techniques to measure feelings, enabling it to test and validate ground-breaking marketing, including John Lewis's Christmas ads.

At first, System1 found that telling customers they needed to change their whole approach would often cost it business. So the company turned its techniques into straightforward products, allowing customers to experiment with behavioural testing and see the benefits for themselves, before offering to create marketing for them. Kearon thinks in terms of "Olympic" cycles (it's one of the most significant events in the world of marketing), and he wants the business to double in size each cycle. If it does, staff, who share in the profits, will do very handsomely as will the company's shareholders.

Paul Swinney, Tristel (LSE: TSTL)

Enterprise value: £80m

Debt-adjusted p/e: 30

Companies with long histories inevitably face crises along the way. Yet, helped by their controlling stakes, Iddings and Cassel's intelligent fanatics overcame adversity using courage and adaptability. Paul Swinney, founder and chief executive of Tristel, faced a similar test at the end of the last decade. The company started when Swinney spotted a small advertisement in the business section of The Sunday Times. It offered the chance to invest in a portfolio of disinfectants, whose chlorine dioxide chemistry made them as effective as the strongest disinfectants used in hospitals, yet safer for humans to handle. While the proprietary chemistry was not protected by patents, Tristel patented the delivery and audit systems that allowed it to be used safely.

However, towards the end of the 2000s, Tristel was driven out of its most important market supplying disinfectant for machines that cleaned medical endoscopes when the machine manufacturers acquired their own products. Alive to the risk, Tristel had developed wipes that clean simple instruments without requiring an expensive machine. Tristel Wipes are now the standard method of cleaning these instruments in UK hospital departments. The firm, which has also developed disinfectants for hospital surfaces, veterinary practices and laboratories, now has higher revenues and profits than it had when it was dependent on the machines.

The company is now registering and selling products around the world. Since it takes time and money to get approval for a product, the registrations, like the patents and Tristel's chemical and manufacturing know-how, create a wide moat to deter rivals and Swinney's fanatical persistence doesn't hurt either.

Warren Buffett is the only genuine household name in investment. Even people who've never once glanced at the financial pages know about the genial, folksy, Coke-swilling guru from Omaha, and the countless ordinary Americans who have become multi-millionaires by being early investors in his Berkshire Hathaway investment vehicle. So it's little wonder his every move is pored over.

Now Buffett has invested in Canadian mortgage lender Home Capital Group (HCG). HCG ran into trouble because it uncovered a problem with widespread mortgage fraud but took too long to tell shareholders about it (as far as the regulator is concerned). This in turn almost triggered a Northern Rock-style run on the lender. The share price plunged from more than C$30 to as low as C$6, then recovered to around C$15 after a Canadian pension fund provided a temporary lifeline.

Last week, Buffett stepped in, and the price leaped above C$18. "Ah," you might think. "Buffett has bought a distressed stock. It must be turnaround time. Should I copy him?"

Sadly not. You can't copy Buffett because only Buffet can get the deal he's getting. In exchange for giving Home Capital a C$2bn overdraft he has the chance to buy C$400m of the shares (almost 40% of the company) at around C$10 a share a 33% discount to the public share price just before the deal was announced. That's on top of the interest he'll make on the loan. That makes it a very different deal to the options open to the ordinary investor. It isn't the first such deal Buffett has done.

A week after Lehman Brothers went bust in September 2008, Buffett invested $5bn in Goldman Sachs. As Stephen Gandel notes on Bloomberg, five years later, an ordinary investor in Goldman had made just 17.5%. Buffett had made 67%, partly because Goldman had given him preferred stock paying 10% a year.

The truth is that Buffett isn't just a value investor, or a quality investor. His real skill lies in grasping what his investment edge is at any point. When you manage millions, you can have an edge in obscure small caps. When you manage billions, you might have an edge in quality large caps instead (similar to Nick Train or Terry Smith in the UK). Buffett's edge is his reputation and his vast pool of liquidity.

When no one else can lend you money, Buffett can bail you out as long as you can pay up for his stamp of approval. You can't copy Buffett's style, but you can work out whether you have some sort of edge. And if you don't, then you can still follow Buffett's advice save regularly into cheap index funds, and put your time to more profitable use than fretting over the market's ups and downs.

Charlie Munger was born in Omaha in 1924 and worked in Warren Buffett's grandfather's grocery store. After a stint in the air force, Munger went to several universities without graduating, eventually emerging with a law degree from Harvard Law School in 1948. After working as a lawyer he founded the investment firm Wheeler, Munger & Company in 1962 and ran a successful fund for the next 13 years. Later on, Munger became Warren Buffett's right-hand man at Berkshire Hathaway, serving as CEO of Wesco Financial, one of Berkshire's main holdings.

What was his strategy?

Munger was originally a value investor, buying companies that were trading below their book value (net assets). He also believed in concentrating on a handful of stocks at times he held no more than three companies. He argued this allowed him to focus on a few great opportunities, rather than several ones that were merely good. Later, his emphasis was on buying "growth at a reasonable price". He took this philosophy to Berkshire, which had an influence on Buffett.

Did it work?

His concentrated portfolio made his fund very volatile. It fell by 31.9% in 1973 and then 31.5% a year later, but rose by 71.7% in 1962, 56.2% in 1967 and 73.2% in 1975. Overall, it would return just under 20% a year between 1962 and 1975, turning an initial investment of $100,000 into $1.2m by the end. Over the same period the S&P 500 rose by just 4.9% a year. According to Forbes, Munger is currently worth $1.42bn.

What was his best trade?

Munger helped persuade Warren Buffett to buy the confectionery firm See's Candies in 1972 for $25m, even though it was trading at three times book value. Over the next 25 years, profits at the stores grew by 24 times, a compound average growth rate of 13.5%, even before accounting for the large dividend, which increased the return to around 20%. Munger's best private investment was buying a share of oil royalties in a well in 1962 at a time when the oil price was at an all-time low. Within a decade Munger was receiving $100,000 a year.

What lessons does he have for investors?

Concentrating on just a handful of investments (though perhaps not to the extent Munger did) can help the average investor focus their attention on the best opportunities. The See's Candies investment shows that occasionally breaking your own rules can be a good idea, if the investment case is sound.

Born in 1915, Paul Samuelson got his degree in economics from the University of Chicago, followed by a PhD in economics from Harvard in 1941. He worked at the Massachusetts Institute of Technology from 1940 onward, becoming a full professor in 1947. He went on to win the Nobel Prize for Economics in 1970, while his introductory economics textbook, first written in 1948, has gone through 19 editions. Samuelson would play a key role in founding Commodities Corporation in 1969. He died in 2009 at the age of 94.

What was his strategy?

Publicly Samuelson was one of the key people involved in the development of the efficient market hypothesis, which argued that markets reflected all publicly known information, which means that it's impossible for fund managers to beat the market. He therefore suggested that someone should set up a low-cost fund that just tracked the market instead. Commodities Corporation, which was set up by Helmut Weymar, hired top computer scientists and traders to discover patterns in the market, which they would then exploit.

Did it work?

Samuelson's 1974 article about indexing, "Challenge to Judgement", persuaded Jack Bogle to set up the first retail index fund two years later. Thanks to Samuelson and Bogle, a third of all mutual fund money is now managed passively. Commodities Corporation rose in value by more than 100 times in its first 20 years. It was acquired by Goldman Sachs in 1997.

What was his best trade?

At the same time as he put $125,000 into Commodities Corp., Samuelson invested a lot of money in Warren Buffett's Berkshire Hathaway. This proved to be a good investment since between 1970 and 2009 each $1,000 invested in its stock would have become $2.12m, an annual return of more than 20%. As a result, Samuelson made more money from investing than he did from his writing or his work as an economist.

What lessons does he have for investors?

Samuelson's public support of indexing contradicts his more private support of hedge funds and active management. But what this contradiction points to is that not even the strongest supporters of the efficient market hypothesis are fully convinced that it always quite works like that in the real world that it is at times possible to beat the market. This suggests that, even if you haven't got the time to trade or pick stocks yourself, you can still do well if you find someone who can.

Shares in Berkshire Hathaway, Warren Buffett's holding company, are now worth over $200,000 each. Berkshire, which invests in businesses from insurance to rail freight, could be bought for under $10 in the early 1960s.

It is so expensive because it has never undergone a stock split. A pricey stock is harder to buy or sell, but Buffett says that weeds out short-term speculators and encourages the kind of long-term investor he wants.

Warren Buffett, one of the world's most successful investors, has revealed his latest big buy.

Buffett's investment vehicle, Berkshire Hathaway [NYSE: BRK] has bought shares in oil giant Exxon Mobil [NYSE: XOM] worth $3.45bn. Berkshire now owns 0.9% of Exxon.

Buffett's move has triggered a fair bit of excitement about Exxon. The bulls have highlighted the fact that the company trades on a price/earnings multiple of just 11.8 times next year's earnings. It's also paying a 2.7% dividend, well ahead of the average for the S&P 500 index.

It looks cheap, and Buffett is buying. Those are two good reasons to get excited about any stock.

But I don't think you should follow Buffett's lead. Here's why

Some of Exxon's biggest businesses are struggling

Refining is the worst of the three. Profit margins are thin and look set to stay that way. There is simply too much refining capacity around the world. Things are so bad in this sector that Exxon's refining profits have slumped 81% over the last year.

On the exploration side, oil exploration is also a tough business. Most of the low-hanging fruit was found long ago. If you want to find new oil reserves these days, you have two options.

You can explore in remote locations such as the Arctic or Kazakhstan. Or you can find ways of obtaining oil from fields where extraction was previously considered too difficult.

In fairness to Exxon, it's following both of these approaches. It's exploring in the Arctic as part of a joint venture with Russia's Rosneft, while it's extracting oil from oil sands (an unconventional source of oil) in the Kearl sands project in Canada.

The trouble is, these projects are expensive. Even if a project does eventually strike oil, it can be a long time before the exploration costs are paid off. For example, with its Kashagan project in Kazakhstan, Exxon doesn't expect a decent return until 2040, even although production has already commenced.

Remember also that some oil-producing countries have been keen to develop their own national oil companies. That's made it harder for the likes of Exxon to access fresh oil fields.

Production is the jewel in Exxon's crown but it's still a tough business

But that production can only be sustained if the exploration continues to be successful, and that's a huge challenge. Indeed, production has fallen over the last two years. That decline has only been arrested by production starting at Kearl sands.

So you can't assume for a moment that Exxon is a one-way bet that will carry on producing oil at current levels for generations to come.

And this is all before you throw in the wild card of climate change. It's tough to make any firm predictions here. But there has to be at least a chance that governments will eventually decide to aggressively clamp down on carbon dioxide emissions. One way or another, that won't be good news for any oil company.

I suspect that you might by now be wondering: "But what about shale oil? Hasn't that transformed the energy industry?"

And you're right. The boom in shale oil is a major change and has dramatically increased oil production in the US. Trouble is, Exxon doesn't have a big presence in shale oil, so shareholders can't rely on that, even if Exxon has a stronger position in shale gas.

Exxon might make sense for Buffett but you and I have better options

And with Exxon, he's got a large company, trading on a low rating, which also delivers an excellent 25% return on capital.

But as I'm much poorer than Buffett, I can choose from a much larger universe of potential investments. Given all the things to worry about with Exxon especially its growing costs of production I'd rather put my money in some smaller companies where I think the risks are lower. Over the long-term, I think they'll probably do better.

I mentioned some of the small companies I'm investigating in a recent Money Morning. And if you're interested in playing the shale revolution, my colleague David Stevenson over at the Fleet Street Letter has put together a report on the prospects for fracking in Britain you can read it here.

The Fleet Street Letter is a regulated product issued by Fleet Street Publications Ltd. Your capital is at risk when you invest in shares, never risk more than you can afford to lose. Please seek independent financial advice if necessary. Fleet Street Publications Ltd. 0207 633 3600.

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