Danaher (NYSE: DHR) has generated investment returns of around 200,000% over the last 40 years, outpacing the broader stock market by several multiples. The firm remains less famous than the major technology giants, but its record of creating value for shareholders ranks among the best in the world. Since its move into manufacturing in 1984, the firm has turned a small sum into a fortune by mastering a disciplined system of buying and improving companies.

This firm shows how a steady focus on process can change even the most unpromising assets into a strong competitive advantage. It moved from its early days as a failing property firm to its current status as a leading healthcare-equipment provider when the founders shifted from corporate raiding to a more patient model of long-term compounding. To understand the current success of this business, one must first look back at the lessons learned during its high-stakes beginnings.

Danaher began as DMG, a real-estate investment trust that by the early 1980s had fallen on hard times. In 1984, two ambitious young brothers, Mitchell and Steven Rales, bought and repurposed the entity as a vehicle for aggressive dealmaking. The brothers used high-yield debt and the trust's accumulated tax losses to buy unloved industrial companies and shield profits from the taxman. At this stage, the company operated as little more than a machine designed to make a fast return on borrowed money. In 1985, the strategy changed after a failed bid for the Scott Fetzer Company. This attempt at a hostile acquisition turned into a public clash between two different styles of investing. The Rales brothers offered a significant sum, but the owners preferred a lower, friendly offer from Warren Buffett – the legendary CEO of Berkshire Hathaway. They chose the lower offer because they preferred his plan for the company over the aggressive tactics of the Rales. It was like a homeowner choosing a buyer who plans to raise a family in their beloved house rather than an investor who intends to turn it into a block of flats.

Danaher's lessons from Warren Buffett

This unsuccessful bid taught the brothers that hostility and excessive debt often destroyed the very value they wanted to capture. This loss prompted a new way of thinking and they began to pursue businesses with a durable competitive advantage that they could hold for decades. This shift occurred during a fishing trip that the Rales brothers took at Danaher Creek in Montana. The name change to that of the river reflected a move away from asset-stripping. The business began to pivot from being a collection of random businesses into a conglomerate of niche plays. By targeting companies with dominant positions in small markets, Danaher applied a consistent system to drive growth over many years. It remained important to secure attractive deals, but the emphasis shifted away from financing concerns towards expanding profit margins and strengthening the competitive positions of newly acquired businesses.

By 1990, the brothers completed the transition of Danaher into a professional investment machine. Mitchell and Steven Rales stepped back from executive roles to become board members, acting as stewards of the company rather than its daily managers. By hiring professional leaders to run operations, the founders focused entirely on the broader investment strategy. This enabled Danaher to evolve into a platform designed to acquire high-quality businesses and manage them with care. The strategy was set, but the company required a rigorous process to ensure these new acquisitions improved after the purchase.

Danaher solved this operational challenge through the Danaher Business System, or DBS. This framework serves as the organisation's central guiding operating system. In the late 1980s, the leadership looked to Japan to understand why Toyota outperformed American car companies. They discovered the concept of kaizen, or continuous improvement. Ironically, Japanese corporations had adopted American business styles in developing kaizen, so, in a sense, Danaher was merely repatriating US ideals. While other Western firms viewed this as a tool for the factory floor, Danaher's bosses adopted it as a universal management philosophy. They applied the concept to every corner of the business, from factories to the head office.

The system rests on four central pillars: people, plan, process and performance. This framework mandates a culture where associates spend most of their time on execution rather than on analysing results. This approach prevents the common corporate trap of “analysis paralysis”. One important component is hoshin kanri, or “compass management”. This ensures every part of the business points toward the same goal. It aligns the board's strategy with the daily tasks of every employee to ensure everyone pulls in the same direction.

DBS operates as an underpinning philosophy embedded in the way that every unit runs, rather than simply a manual or a newsletter that people might ignore. Even the board members regularly spend entire weeks leading kaizen events on factory floors to identify and eliminate waste. By focusing on the place where the work happens, known in Japanese as gemba, the firm stays grounded in reality. This commitment to process ensures that every acquisition quickly improves to generate superior margins and predictable growth. This internal engine has allowed the business to transition between industries without losing its competitive edge.

Danaher has moved from purely industrial businesses towards areas with long-term competitive advantages, specifically life sciences and diagnostics. The business operates a “picks-and-shovels” model, choosing the firms that provide the essential tools for research rather than taking the risks associated with drug development. If a pharmaceutical company fails to bring a new cure to market, they can lose everything. Danaher sells the filters and resins that laboratories need regardless of which specific drug wins approval. This creates a steady revenue stream tied to the broader growth of global healthcare.

The biotechnology branch drives much of the growth. Through its brands Cytiva and Pall, the firm dominates the production of monoclonal antibodies. These complex medicines treat diseases such as cancer and migraines, and were vital during the pandemic. They also feature in everyday laboratory testing, most notably in pregnancy tests. The equipment is specified into the drug manufacturing process itself. Once a medicine wins regulatory approval, the specific filters and components used to produce it are locked in. Switching to a rival supplier would require a long and costly review of the entire factory process. The diagnostics division offers a similar edge. This creates a high degree of certainty for future sales. It moves the business away from the unpredictable cycles of heavy industry towards a more reliable stream of income and this focus on non-discretionary health trends has lowered the long-term risk profile of the business.

A professional acquisition machine

Danaher functions as a professional acquisition machine, which avoids buying businesses simply for the sake of growth. Instead, it follows a rigorous plan to identify markets where it can create a sustainable competitive advantage. These acquisitions fall into two main categories: platforms representing foundational entries into vast new industries that serve as a base for future expansion; and bolt-ons, or smaller firms designed to fill specific technical gaps. The group merges these smaller companies into existing divisions to remove overheads and share technology.

A high level of discipline dictates the price paid for these assets. Every potential deal is measured against a strict financial goal, where the business must produce a 10% return on invested capital by its fifth year. Management specifically looks for businesses with high gross margins, but low operating profits. A high gross margin suggests the product is vital to the customer. A low profit margin suggests the business is being run inefficiently. This gap represents the opportunity for improvement. By applying the Danaher Business System, the firm often doubles the margins of a new arrival within three to five years.

The DBS Office manages this transformation. This team of internal specialists helps new staff adopt the company culture. This requires employees to spend 70% of their time defining a problem and only 30% on the solution. This ensures the team fixes the root cause of an issue rather than just the symptoms. This explains the success rate, which far exceeds the industry average.

The business has faced setbacks during its growth. The acquisition of Cepheid, which became famous for producing rapid Covid tests, succeeded by scaling a niche provider into a global leader in diagnostics. However, other areas proved more difficult. The bioprocessing inventory glut of 2023 and 2024 presented a recent challenge. During the pandemic, customers over-ordered supplies to avoid shortages. This led to lower sales in the post-pandemic world as those stocks were used up. The firm was caught off-guard by the speed of this shift, leading to frustration among some investors.

Learning from mistakes made internally has also shaped the company. In the past, subsidiary managers made mistakes by focusing too much on specific tools of improvement while losing sight of the broader strategy. These managers would lead kaizen events to fix minor floor issues without ensuring they aligned with the long-term plan. This led the parent organisation to refine its “strategic compass” to ensure every change serves a clear purpose. These challenges forced Danaher to become more transparent and to improve its forecasting to prevent a repeat of such supply-chain shocks.

The firm is currently positioning itself at the frontier of genomic medicine. By using a platform approach, the group aims to standardise the way new cures are made. This is often compared to a burrito, where the outer wrap remains the same while the filling changes. This method could significantly lower the time and cost of treating rare diseases. By integrating artificial intelligence, the firm is creating a digital backbone for the industry. Furthermore, the acquisition of Masimo, a leader in pulse oximetry, allows the firm to capture vital data directly from the patient at the hospital bedside.

Danaher is a much larger organisation today than it was in its industrial beginnings, suggesting that a repeat of the 200,000% return over the next 40 years is improbable. Nevertheless, it remains one of the best businesses in the world at identifying, buying and managing assets. Its unique culture and the rigorous application of its business system set it apart. The astronomical gains of the past may be behind it, but the firm remains an excellent choice for those seeking a high-quality investment.

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Soft-drinks maker AG Barr can trace its roots to 1875, when founder Robert Barr started producing and selling aerated waters from a small factory in Falkirk. “Iron Brew” was launched in 1901 and grew steadily over the next few decades. After World War II, the product was renamed Irn-Bru due to labelling regulations, and in the 1950s, the company started to expand into England. For most of its history, the company has been associated with just one drink, but that changed in the mid-2000s. In 2007, it became the exclusive manufacturer and distributor of Rockstar Energy drinks in the UK and Ireland (this deal ended in 2020). Then, in August 2008, the group acquired Rubicon Drinks, a specialist in exotic fruit-based soft drinks, for £59.8 million. In 2015, AG Barr entered into a ten-year agreement with the Dr Pepper Snapple Group (now called Keurig Dr Pepper) to distribute the Snapple brand in the UK and other UK territories. This deal was quickly followed by the acquisition of Funkin Cocktails the same year.

AG Barr is one of the best examples in the UK of a business that's been able to turn relatively abundant and simple raw materials – sugar and water – into a cult-like product. Thanks to the low cost of its ingredients and the power of its brand, it has consistently earned high profit margins and generated piles of cash year after year. Its return on invested capital (ROIC), a measure of profitability, is consistently above 20%, implying AG Barr can double every £1 invested in its operations within three and a half years. The five-year average for Unilever and AstraZeneca, two of the largest businesses in the FTSE 100, is 15.5% and 10%, respectively.

Over the past six years, to July 2025, AG Barr has generated a free cash flow of £230 million, about a third of its current market capitalisation, with the cash used for acquisitions and shareholder returns. The latest set of deals includes Fentimans, the soft drinks and mixers brand known for its “Botanical Brewing” process, and Frobishers Juices, the premium natural fruit juices and soft-drinks brand, both bought for £51 million.

This combination of cash generation, deals and shareholder returns has helped AG Barr outperform the market with a total return of 13.2% over the past five years (assuming the valuation remained flat at around 18.9 times forward earnings), compared to 12.8% for the FTSE All-Share index. Compared with the likes of Coca-Cola, PepsiCo and Monster, AG Barr is a tiny player. Still, its story is a case study of the lucrative nature of the soft-drinks industry.

How soft-drinks brand Coca-Cola went global

Coca-Cola is the world's most recognisable soft-drinks brand. Invented in the late 1880s (it's about the same age as Irn-Bru), it was originally sold as a syrup to pharmacies for $1.30 a gallon, mixed with carbonated water and sold to customers for five cents a glass, or $6.40 a gallon. Coke carved out a niche in the market due to its low production costs and high margins for its pharmacy partners. The company's real breakthrough came 13 years after its first pharmacy sale when two lawyers from Chattanooga, Joseph Whitehead and Benjamin Thomas, convinced it to give them the rights to bottle the drink. The resulting agreement helped catapult Coca-Cola into the hands of millions of consumers, who could suddenly buy Coke nationwide.

Coca-Cola originally contained cocaine derived from the coca leaf, along with caffeine from the kola nut, which goes some way towards explaining why the general public found the drink so addictive. The company began reducing the cocaine content around 1903 and had removed it from the formula by about 1912, but by that point Coke had firmly established itself in the minds of American consumers. (Coca-Cola still uses de-cocainised (cocaine-free) coca leaf extract. Dried leaves are imported from Peru and Bolivia by Stepan Company in New Jersey, the only authorised US importer of coca leaves, especially for Coca-Cola.)

In 1915, the Coca-Cola Bottling Association voted to spend $500 to develop a distinctive bottle for the drink – a “bottle so distinct that you would recognise it by feel in the dark, or lying broken on the ground”. This gave rise to the company's characteristic bottle, known around the world today, and further accelerated the group's growth. By 1920, more than 1,200 Coca-Cola bottling operations had been established, all of which earned healthy profit margins on the spread between purchasing syrup from Coca-Cola and selling bottles to customers.

Why Warren Buffett loves Coke

Coca-Cola's edge has always been its syrup. The company has in the past flirted with the idea of bottling its own drinks, but it has always returned to the same model of producing and distributing syrup rather than the capital-intensive, costly business of bottling products. By avoiding this pricey and capital-intensive business, it has been able to redirect profit back into growth, mainly through marketing. This is the real secret of the soft-drinks business. Turning water and sugar into a drink isn't difficult. The real challenge is getting consumers to buy your product.

US investor Warren Buffett often uses Coke to explain his concept of a “moat” – a competitive advantage that no amount of money can buy. As he once said, “If you gave me $100 billion and said take away the soft drink leadership of Coca-Cola in the world, I'd give it back to you and say it can't be done”. It was this logic that led him to invest $1.3 billion in Coke in the late 1980s. Today, the stake is worth around $30 billion and the trade is often cited as a case study in the perfect investment. Thanks to its advantage, Coke has significant pricing power. It can raise prices year after year, even if it's only a penny at a time, and still retain its customer base – it's been doing just that for more than a century.

Coke pioneered this model, but today it is energy drinks that exemplify it perhaps more than any other segment of the soft-drinks market. Monster Beverage, for example, has returned nearly 200,000% over the past 30 years for investors and the company has achieved an average ROIC of 23% over the last five years, with the figure rising to 31.6% in 2025 when fourth-quarter sales hit a record $2 billion. Even at the five-year low of 18.4%, that was still far above Coke's 15.9% and PepsiCo's 17.4%. The company uses a similar asset-light model to Coke's. It outsources most manufacturing and focuses on the core product. At one point, Coke even looked at buying the business to break into the energy-drink market; in 2014 it settled for a 16.7% equity stake worth $2.15 billion. Coke also handed over its energy-drink portfolio.

Monster and its leading peer, Red Bull, both spend heavily on marketing. Monster consistently spends roughly 10%-11% of its total net sales on selling and marketing, with a focus on event sponsorships, athlete endorsements (extreme sports/racing), and in-store cooler placements. Red Bull doesn't disclose what it spends as a private company, but it's estimated to be around 20%-30% of sales, which includes the company's F1, football, ice hockey and e-sports teams.

What's particularly interesting about the energy and soft drink market is the intensity of customers' loyalty to the brand. About 60% of consumers prefer to stick with a familiar brand, underscoring the industry's barriers to entry. That being said, there's room for innovative brands to grab some share of the market, especially when they're backed by substantial marketing power. Thirty-nine per cent of consumers aged 25-34 prioritise “unique and innovative flavours” over a brand's name, a shift that's been attributed to the increase in demand in 2025 for Dr Pepper over Pepsi.

Forty-four per cent of young people cite sugar content as their primary concern. Brands that successfully transitioned to “zero-sugar” products (such as Coke Zero or Monster Ultra) have retained their loyalty. Meanwhile, the launch of brands such as Prime Energy, co-founded by social-media celebrities Logan Paul and “KSI”, demonstrates the powerful influence of social-media figures and of consumers' desire to “be part of something bigger”.

New fronts in the Pepsi wars

Competitors have been nipping at the heels of Coke and Pepsi since their very foundation and now there are some visible signs that Coke's $100 billion advantage, to quote Buffett, is starting to wane. After Coke won the Pepsi wars in the 1980s, for nearly 40 years Coca-Cola was the number-one, and Pepsi the number-two, soft drink brand in the US. However, in 2024 Dr Pepper officially tied with (and, by some metrics, surpassed) Pepsi to become the number-two carbonated soft drink brand in the US. In 2000 Pepsi held a 13.5% market share, while Dr Pepper had just 6.3%. Today, those figures stand at about 8.3%. Last year, Dr Pepper's US beverage arm reported revenue growth of nearly 12%, eclipsing that of its larger peers.

This reflects a broader shift in the market. In 1995, Coke and Pepsi together controlled nearly 75% of the US soft-drinks market, while today that share is around 40%. Both firms have had to buy and build new brands to maintain their market share. The Coca-Cola Company actually owns three of the top five brands in America, including Coca-Cola Classic, Sprite and Diet Coke, and 65% of its revenue today comes from outside the US. Overall, 3% of beverages consumed every single day are Coca-Cola products.

PepsiCo, meanwhile, has expanded beyond soft drinks, a shift that's been attributed to its loss of market share. Its sports-drinks and snacks arm now provides the bulk of PepsiCo's profit, with Frito-Lay – which owns brands such as Lay's (Walkers), Doritos and Cheetos – accounting for around a third of revenue and just under half of operating profit. Dr Pepper, on the other hand, has doubled down on its core while leaning into viral media plays. It has exploited “limited time offer” (LTO) deals, with hits such as Creamy Coconut (which went viral on TikTok in 2024 and 2025) and the Dirty Soda trend (mixing soda with cream/lime) turning Dr Pepper into a social-media “lifestyle” brand. It's also been in the right place at the right time as generation Z and millennials have turned to “spicy” or “bold” flavours.

Then there's the so-called “third-button advantage”. Until recently, Dr Pepper was not considered a competitor to Coke or Pepsi, so it was usually available along with these products at drinks dispensers on the so-called “third button”. As bottlers usually produce more than one brand, with some producing Coke and Dr Pepper or Pepsi and Dr Pepper, this makes a lot of sense for all parties involved. What's more, in establishments that had unique agreements with either Coke or Pepsi and as a result only had one or the other, Dr Pepper sat happily alongside both. As well as its distinctive flavour profile, Dr Pepper's unique selling point became its availability.

Whether this competitive advantage will continue remains to be seen. Dr Pepper Snapple has exploited its popularity to go on the hunt for acquisitions. It has bought JDE Peet's (coffee) and Ghost Energy, which it acquired to compete in the high-growth energy-drinks sector. The deals will help raise the company's top line by about two-thirds, but could take attention and resources away from the core brands.

Some soft-drinks brands are losing focus

If there's one thing Monster Energy does better than any other company in the soft-drinks industry, it's focus. The company has some brands outside of its strategic and core Monster Energy segment, but these account for only around 10% of sales (most came into the business via the Coke deal). The company is incredibly profitable and cash generative, with a gross profit margin of 55.8% for 2025 on $8.3 billion of revenue, net income of around $1.9 billion and a near-100% free cash conversion ratio. But management has historically preferred to return this cash to investors or market the brand rather than buy up new businesses. The company ended 2025 with nearly $2.8 billion in cash and short-term investments and no debt.

Over the past 15 years, this focus has translated into a 21.2% annual total return for investors, compared with 8.2% for Coke, 8.8% for Pepsi and 10% for Keurig Dr Pepper. Revenue growth tells the whole story. Over the past five years, Monster's revenue has increased 51% compared with 24% for Coke, 18% for Pepsi and 31% for Dr Pepper.

More worrying is the overreliance on prices to drive this growth. Since 2021, Coke has shifted from trying to sell the most product to trying to make the most profit per ounce. To do that it's hiked prices and reduced the size of packaging, helping the bottom line (net income has risen from $9.5 billion in 2022 to $13.1 billion in 2025), but it is really testing consumers' loyalty. Prices rose 6% in 2021, 11% in 2022, 10% in 2023 and 8% in 2024. However, volume rose just 8% in 2021, 5% in 2022, 2% in 2023, flatlined in 2024 and was on track to decline in 2025. That was stopped after Coca-Cola's chief executive, James Quincey, admitted that the “pricing lever” had been pulled as far as it could go.

Pepsi, too, has had to pull back on pricing. After years of price hikes (in 2024, French supermarket giant Carrefour famously said it would stop stocking PepsiCo products “due to unacceptable price increases”) it has announced price cuts of up to 15%

In both cases, these companies seem to have fallen into the classic Wall Street trap of financial engineering to drive returns while ignoring what really matters: the consumer. All three of the top giants are spending billions of dollars on debt interest, share buybacks and dividends, as topline growth has wilted. Coke has $46 billion of debt, Pepsi has nearly $50 billion and Keurig has nearly $16 billion.

These companies might have lost their way, but there is no denying their core soft drink businesses remain tremendously profitable. Rather than looking at the big companies, investors should focus on the smaller players – those with strong balance sheets, room for further acquisitions or cash returns, and businesses that can still fight for market share and drive growth through both the top and bottom lines, as well as drive volume growth.

The best soft-drinks stocks to buy now

In the UK, AG Barr (LSE: BAG) is the top pick. According to Panmure Liberum, the stock is trading at a fiscal 2026 price-to-earnings (p/e) ratio of 14 with a yield of 3.1 and a free cash flow yield of 6%. Even after recent deals, analysts believe the company will end the year with net cash of £53 million, excluding leases, around 7% of its market capitalisation.

Monster Energy (Nasdaq: MNST) shows no signs of slowing down over the coming years, with analysts at UBS predicting 11% revenue growth for 2026 and high single-digit annual revenue growth until the end of the decade. Economies of scale should help the company's net margin rise from 23.7% to 27.7% over the same period and, considering Monster's record of capital allocation, most of this additional income should flow back to investors. UBS has the shares trading at a forward p/e of 38.6 or 26.2 for 2030, compared with the five-year average of around 40.

Keurig Dr Pepper (Nasdaq: KDP) is worth watching. If the company can execute its latest transactions successfully while still growing the underlying business, it does look cheap compared with its growth potential. UBS has the company trading at a free cash-flow yield of 7.8% on a forward (fiscal 2026) basis and a p/e of 13.6, with a yield of 3.2%. In 2022, the stock traded at a p/e of 22.3, so there's room for a re-rating if the company can convince the market it's heading in the right direction. On debt, UBS believes Dr Pepper can take net debt down to $5.6 billion by 2029. If management can meet this target, further deals and shareholder returns could be on the cards.

One play that really leans into the low-calorie trend is Celsius Holdings (Nasdaq: CELH), which produces the premium, lifestyle energy drink CELSIUS – marketed as the zero-sugar alternative to traditional energy drinks. The company is in growth mode, with revenue jumping from $1.4 billion to $2.5 billion last year, while net income nearly doubled to $390 million. At the beginning of last year, the group acquired Alani Nutrition for $1.8 billion, another energy-drink and snack firm, and in the last year, sales here have doubled. Celsius has no debt and analysts have pencilled in a near doubling of revenue growth by the end of the decade (although based on recent growth, that's conservative). The shares are trading at a 2026 forward p/e of 32.7 and a free cash-flow yield of 3.4%.

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Nick Train, Terry Smith, James Anderson and Harry Nimmo are among the most celebrated British fund managers. All four built outstanding records in their respective styles by employing a high-conviction investment approach with concentrated portfolios.

What “concentrated” means will vary. It could be 20 larger stocks. It could be as much as 50 if you are looking at riskier small caps. It could be a heavy focus on a particular sector. Regardless, it isn't for the faint of heart, but there are plenty of managers and funds that have outperformed by picking the right basket of businesses.

Warren Buffett, perhaps the most famous investor of all time, has long said that it only takes a handful of “wonderful companies” to beat the market in the long term – although he has also said that most people should simply buy index funds.

Concentrated portfolios: the hedge fund way

Very concentrated portfolios are common with many top hedge fund managers. Chris Hohn's $50 billion TCI Fund Management owns fewer than ten stocks according to public filings. Visa accounts for nearly 20% of the disclosed portfolio. Bill Ackman's Pershing Square Capital Management, the hedge fund behind the London-listed investment trust of the same name, has just 11 holdings. While the Bill & Melinda Gates Foundation Trust is not a hedge fund, it is also highly concentrated, with 80% of its equity assets in five holdings.

This can result in exceptional returns. London-listed Pershing Square (LSE: PSH) has generated an annualised net asset value (NAV) return of 325%, or 14% over ten years. Other top performers include 3i (LSE: III), whose portfolio is dominated by European discount retailer Action and activist UK small-cap trust Rockwood Strategic (LSE: RKW) with 25 holdings in total. High-flying sector trusts such as Polar Capital Technology (LSE: PCT) are also effectively very concentrated, even if they hold a larger number of stocks.

Yet we can also see many concentrated portfolios go wrong. Take Train's Finsbury Growth Trust (LSE: FGT), which has 85% of NAV in its top-ten holdings. This has had a very poor five years since Train's quality-growth style went out of favour. Smith's Fundsmith Equity has also been notably weak. Scottish Mortgage (LSE: SMT), previously run by Anderson, had a very tough 2022 as its high-conviction growth approach struggled, although it has since improved.

Concentrated portfolios can provide unreliable results

So do concentrated portfolios work on average? Not reliably, according to financial data provider Morningstar. It looked at 5,800 European-domiciled equity funds from 2015 to 2025 and evaluated each fund's “portfolio boldness and diversification by integrating stock, sector, and return-based factors”.

The results showed that “on average, there is little to no meaningful relationship between concentration and returns” and “concentrated funds have a substantially wider spread of outcomes, with fatter tails on both sides”. In other words, while concentration can lead to outperformance, it can also result in underperformance with “similar or greater frequency”. There is also a “higher probability of severe losses”. Highly concentrated funds are also more expensive than diversified funds (and far more than passives), which acted as a further drag on returns.

Ultimately, Morningstar found that low-concentration portfolios outperformed all high-concentration portfolios in all categories over the ten years to the end of 2025. The difference was minimal in emerging markets, but in the global and US sectors, it “amounts to approximately one-tenth of total ten-year returns, which is financially meaningful”. In short, managers who consistently outperform with a high-conviction portfolio are rare. So investors should be cautious when assuming that a hot streak will continue.

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In the late 1990s, a young Stella Li landed in Rotterdam from China with $30,000, a container load of lithium-ion batteries and an order from head office: “sell them to survive”. She clinched a deal with Nokia, then the number one mobile-phone maker. Never one for false modesty, she told the Financial Times: “I opened the door and moved BYD to another level.”

Nearly 30 years on, the company has moved far past its roots as a battery maker to become one of the world’s most powerful manufacturers of electric vehicles. Globe-trotting Li remains so firmly at the heart of its international expansion that colleagues have dubbed it “The Stella Show”. Yet the stakes, while much higher, are just as existential. BYD sales grew by 40% last year, but it is having to grapple with both rising Western protectionism and a darkening domestic outlook in China in the teeth of cut-throat competition. It’s going to be “very difficult for BYD to continue to grow the way it’s been growing”, says analyst Tu Le of Sino Auto Insights.

“A diminutive woman with almost frenetic energy,” Li, 55, “zips across the globe furiously, rarely making it back to her current home in Los Angeles”, says Fortune. In a typical day, BYD’s “crucial ambassador and strategist” might wake up in Istanbul, fly to a meeting in Vienna and then spend the night in Germany. The carmaker now exports to roughly 95 markets, but Europe is particularly crucial to its global push. In markets such as Britain – which this year became BYD’s biggest outside China – the company has become “Elon Musk’s worst nightmare”.

At its heart, BYD – which was founded in Shenzhen in 1995 by Wang Chuanfu – has always been a partnership. While Li led marketing and expansion, Wang, 59, was the engineer behind the group’s rapid technological advancements and manufacturing prowess. He never wavered from his dream of building electric cars, even when it looked like a long shot. The pair met soon after Li had graduated from Shanghai’s prestigious Fudan University and the relationship developed romantically as well as commercially.

BYD stands for “Build Your Dreams”, but back in the early days when Li was pestering mobile-phone executives in Atlanta suburbs with her box of battery samples, she used to joke that it stood for “Bring Your Dollars”, says Bloomberg Businessweek. Her great strength then was persistence. It took her two years to win a contract from Motorola. But by 2002, when BYD went public in Hong Kong and Shenzhen, the company was on a roll. Many investors were furious when Wang bought a majority stake in a failing state-owned carmaker a year later – appalled that BYD “was wading into a market it knew nothing about”. At the time, Wang didn’t even know how to drive, but was convinced that electric cars were “a natural extension” of the battery business.

The first clunky models did nothing to dissuade the critics, but Wang continued to pour cash into product development.

Stella Li's deal with Warren Buffett

The deal that put BYD on the map was Berkshire Hathaway’s landmark $232 million investment in 2008, says the FT. Li was introduced to Warren Buffett and Charlie Munger by her friend Li Lu, a billionaire hedge-fund manager. In the nearly two decades that Berkshire stuck with BYD until completing its exit this year, it reportedly netted a return of about $7 billion. In that time, BYD has achieved what Tesla, Ford and the rest of the car industry haven’t, says Businessweek: “build an affordable electric car for the masses and make money doing it”. Jean-Francois Baril, chair of Nokia’s owner HMD Global, who has known Li for more than two decades, credits her with “bridging the East and the West”, says the FT. She’ll need all that skill to keep BYD on the road in the years ahead.

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Warren Buffett is the Lionel Messi of the investment world. His investment performance has been so strong over the course of his career that people have taken to calling him the Sage of Omaha. If the world of investing has a celebrity, Buffett is it. 

In 1965, he took control of a textile manufacturer called Berkshire Hathaway and turned it into an investment vehicle. Today, this fund holds positions in more than forty stocks including Apple, Bank of America and Coca-Cola. And through his successful stock picking and his valuation-focused investment style, Buffett has delivered eye-wateringly good performance for investors.

Over the full course of its history, Buffett’s fund has returned 4,384,748%, according to Berkshire Hathaway’s latest annual report. This means an initial $100 investment would now be worth over $4.3 million. “For some context the same $100 invested in the S&P 500 would now ‘only’ be worth $31,323,” adds Laith Khalaf, head of investment analysis at AJ Bell. 

However, while Buffett’s performance is exceptional, there are a number of top investment funds and trusts on the market that have managed to rival the Sage of Omaha’s performance in recent decades, according to analysis from AJ Bell. And while their track records might not be quite as long as that of Berkshire Hathaway, they still merit consideration. 

We share a roundup of these high performing funds and trusts, before highlighting some of Buffett’s top investment tips. 

Funds that have beaten Buffett

Few funds go back as far as 1965, so AJ Bell’s analysis focuses on the past two decades. However, Khalaf highlights that even recent performance has been impressive so far as Berkshire Hathaway is concerned.

He says: “Over the last twenty years, Berkshire Hathaway has posted a dollar return of 555%, which translates into an 855% return for UK investors thanks to a weakening in the pound. That compares to a return of 738% from the S&P 500, in pounds and pence.” 

“That might not sound quite as jaw-dropping as compounded outperformance since 1965, but it still equates to beating the S&P 500 by 0.7% a year.” 

“That’s not to be sniffed at given the tremendous rise in the US stock market and the fact that Berkshire Hathaway has largely eschewed the technology stocks that have been responsible for the meteoric rise of the S&P 500,” he adds.

The following funds and trusts have beaten this 855% return over the past two decades.

Source: AJ Bell using data from Refinitiv and Morningstar. NAV total return in GBP to 19 April 2024. NAV total return may be more or less than share price return for investment trusts. 

How have these funds beaten Warren Buffett?

Half of the funds in the league table are tech-focused products – and tech companies have enjoyed an inexorable rise over the past two decades. Stocks like Nvidia have seen their share price grow by more than 200% over the past twelve months alone. 

Meanwhile, Buffett’s view on tech stocks has been lukewarm. While his stance has evolved somewhat in recent years (he now owns a large holding in Apple), he has previously described them as complicated. And a key principle of his investment philosophy is investing in companies that you understand. 

Other funds in the list have been boosted by strong market growth too, for example, Indian equities have soared during this period. “Others have prospered despite hunting in markets with less spectacular performance, such as Europe and China”, Khalaf adds. 

How to invest like Warren Buffett

If you would prefer to learn from the Sage of Omaha’s wisdom rather than trying to beat him, these five tips could help:

1. Take a valuation-focused approach

Warren Buffett’s investment philosophy is based on identifying undervalued companies and buying them at a discount. He then looks to hold them over the long term, in the belief that their share price will increase over time.

“All there is to investing is picking good stocks at good times and staying with them as long as they remain good companies", he once said.

2. Be patient

On a related note, Buffett warns investors against taking a short-term view. He famously said, “Someone’s sitting in the shade today because someone planted a tree a long time ago”. The same is true with investing – it’s about time in the market, not timing the market.

“One of Warren Buffett’s most often quoted quips is that his favourite holding period is forever… [He] thinks you should be happy to sit on your portfolio even if the market closed down for ten years”, Khalaf adds. That’s assuming the company in question remains a good one, of course. 

3. Use index trackers

Despite forging a successful career as an active stock picker, Buffett isn’t against using index funds. In fact, he really likes them and says that both large and small investors should use them. 

In the 2016 Berkshire Hathaway report, he wrote: “When trillions of dollars are managed by Wall Streeters charging high fees, it will usually be the managers who reap outsized profits, not the clients.”

4. Reinvest your dividends

If you reinvest any dividend income you earn, then it will help you buy more shares. In turn, you will earn “returns on returns”. This is also known as compounding – and Albert Einstein called it the “eighth wonder of the world”. It is one of the most effective ways of growing your wealth. 

“Buffett likes to receive dividends, even though Berkshire Hathaway doesn’t pay one”, Khalaf explains. “Part of the rationale is Buffett has plenty of opportunities to reinvest the dividends he receives within his portfolio”, he adds.

5. Avoid investments you don’t understand – and stay away from crypto

A key piece of advice from Buffett is that you should only invest in companies you understand. This makes sense when you think about it. Investing isn’t gambling – it involves making an informed decision after thoroughly researching a company’s current financial position and future prospects. 

This is one of the reasons Buffett has stayed away from tech stocks in the past. He now has a large holding in Apple, but he has previously described the company as behaving more like a consumer goods company in terms of its economic characteristics.

Another area Buffett warns investors to steer clear of is cryptocurrencies, describing them as “rat poison squared”. 

“Crypto is going through another boom, but it has few genuine economic uses, and its long-term adoption by consumers, businesses and investors as a medium of exchange or a store of value is highly speculative”, Khalaf adds.

This means investors should only invest in crypto assets like Bitcoin if they are willing to lose any money they put in. 

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.  

Bernard Arnault’s net worth is $173 billion, making him the fifth richest person in the world according to Bloomberg’s Billionaire Index. Arnault is one of the majority shareholders in the luxury group LVMH, a company he's built over the past few decades. Like most of the world’s richest entrepreneurs, such as Bill Gates and Warren Buffett, Arnault’s hard work building a global business empire has paid off handsomely.

However, the last couple of months have been rocky for Arnault – at the end of September, LVMH suffered a 20% fall in its stock price, shaving $54 billion off his net worth, according to Fortune. But it bounced back at the start of October after China announced its stimulus plan to grow – it’s no surprise as LVMH relies heavily on China for its sales.

Here we look at how Bernard Arnault built his fortune and the factors contributing to his net wealth today.

Bernard Arnault's net worth

Bernard Arnault inherited his father's construction company, Ferret-Savinel, in 1971, although he quickly realised it wasn't what he wanted to do with his life.

The young businessman sold the company and used the proceeds to help fund the acquisition of Christian Dior in 1985 – the company that would become the foundation of LVMH.

Arnault had always been interested in luxury goods, and with Dior he saw a company with a strong brand and a loyal customer base – the most important components of any luxury brand. However, he also noticed the business wasn’t living up to its full potential. The young businessman believed he had the skills and drive to turn the business into one of the world’s premier luxury companies.

He set about looking for other luxury companies to bolt on to the Dior business. He knew that, in order to compete with the biggest players in the market, he would need a diverse range of products and brands that complemented each other.

With that goal in mind, Arnault merged Dior with several other luxury goods companies in 1987, including Louis Vuitton, Moët et Chandon and Hennessy, to create the conglomerate known as LVMH. The combined group not only had a great stable of businesses under one roof, it also benefited from economies of scale.

The creation of the business came at a great time. Luxury goods have always had a place in the market, but in the late 1980s and early 1990s, there were some huge changes going on in the world that acted as tailwinds for the young LVMH.

The biggest of these was the rise of China.

LVMH benefits from China’s economic growth  

In the 1990s, China's economy underwent significant reforms, transitioning from a centrally planned economy to a market-oriented economy.

The opening up of China's economy to the world, through the introduction of those market-oriented reforms, created opportunities for businesses to expand their operations and tap into new markets. This led to a surge in global trade and investment as companies sought to take advantage of China's growing economy. It became an important player in the global economy. Its demand for raw materials and commodities helped to boost trade in these sectors, while its expanding middle class provided opportunities for businesses selling consumer goods and services.

China's rise pushed down the cost of goods for other countries, freeing up more disposable income for consumers around the world, to spend on things like luxury products.

Arnault continued to expand LVMH during this period through strategic acquisitions and partnerships, and as the group grew, it was able to swallow up bigger peers. In 1999, LVMH acquired Sephora, a cosmetics retailer; in 2011, it acquired the Italian jewellery brand Bulgari.

In 2020, the group announced its largest deal, the $16 billion acquisition of Tiffany.

With its growing size, LVMH has been able to spend huge amounts on marketing, increasing its market share and visibility to consumers.

Bernard Arnault’s LVMH dynasty 

As the company's largest single shareholder, Bernard Arnault has benefitted from LVMH's rise and rise.

In April 2023, LVHM gave the Tiffany flagship store in Manhattan a makeover and, shortly after this, LVMH became the first European company to reach a market valuation of $500 billion.

More recently, an LVMH-backed private equity group purchased a stake in Oxfordshire-based designer shopping outlet, Bicester Village. The deal went ahead for £1.5 billion.

Now, the company is making an entrance into sport. According to The Telegraph, LVMH will take over the sponsorship deal that Rolex has with F1. There are also rumours that LVMH is teaming up with energy drink Red Bull to buy a small football team in France, Paris FC.

Arnault still holds a great deal of control over LVMH, and members of his family hold key management positions. Earlier this year he appointed his eldest daughter, Delphine, to run Christian Dior, the group's crown jewel. His son, Antoine, runs the holding company that controls LVMH and the family's stake in the enterprise.

The businessman has five children, all of whom have top roles across the group. The youngest, Jean Arnault, is the head of marketing and product development for Louis Vuitton’s watches division at only 26 years of age.

Still, despite Arnault's focus on his family, investors have done very well from owning the shares as well, with LVMH muscling its way in to become one of Europe's largest public companies.

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.

When turbulence in financial markets starts making news headlines, it’s easy for investors to get spooked. But if you’re tempted to sell your investments at difficult moments, remember the advice of Warren Buffett. One of the world’s most famous investors once observed: “The stock market is a device for transferring money from the impatient to the patient.”

Data from Alliance Trust – an investment trust launched in 1888 and therefore well-schooled in the benefits of taking the long-term view – offers a stark example of why Buffett’s counsel makes so much sense. Impatient investors can end up thousands of pounds worse off – and the damage done by impatience increases over time.

The cost of impatient investing

To illustrate the point, Alliance Trust modelled the returns achieved by two investors who started putting money into its fund in 1992. Both investors began with a £10,000 investment, and then invested 10% of the average UK salary each month and reinvested dividends thereafter. The only difference between the two investors was their level of patience. One left their money untouched for the whole 30 years; the other sold 25% of their investment each time the market fell 5% in a single day, buying back into the fund once the market recovered 10% in a single day from its low.

The results are striking. The Patient Investor in Alliance Trust’s analysis would, by now, have a portfolio worth £410,757. Their impatient counterpart, on the other hand, would be sitting on just £217,884. This £192,872 difference is entirely down to investment attitude and behaviour

(1)

. Both investors started with the same resources and put money into the same fund, but one stayed patient while the other chopped and changed as the market ebbed and flowed.

Stock market investors are often warned they must take a long-term view rather than trying to second-guess what will happen over shorter periods. The standard advice is that you shouldn’t be investing unless you’re prepared to hold on to your portfolio for at least five years – and that 10 years, 20 years or more is even better.

However, these warnings are routinely ignored. A survey conducted by Alliance Trust earlier this year found that 12% of investors had cashed in a loss-making holding in the past 12 months – and that 45% had done so in the past

(2)

.

Hold your nerve in turbulent times

These knee-jerk decisions are understandable – no-one likes losing money and everyone wants to avoid further losses. But they are misguided. When your investments fall in value, they generally retain the potential to bounce back – and the value of investments has always risen and fallen over time. Once you sell an investment after a market correction, however, you crystallise the loss and lose its recovery potential.

This is why taking the long-term view – holding your nerve even during the most turbulent periods – is so important. If you could predict exactly when the price of an investment would rise and fall, it would make sense to trade in and out of the market accordingly, but no investor can do that with any confidence. Prudent investors accept that reality and take the patient approach instead.

The joy of compounded returns

Patience pays off for many reasons. First, you avoid the risk of trying to time the market and getting it wrong; this is also a way to manage the risks of stockmarket volatility, since the danger of messing up your timing is even more pronounced when markets are bouncing around unpredictably. Also, you reduce the cost of investment – remember, each time you buy and sell investments there are dealing charges to pay which act as a drag on returns.

Above all, investors should not overlook the power of compounding. When you leave your money invested, your returns are compounded – just like you earn interest on your interest when you have savings in the bank. Over an extended period, this makes a huge difference to the final result.

Impatient investors pay a high price by giving up all of these benefits – think of this as an “Impatience Tax” on your cash. As Alliance Trust’s data modelling illustrates, that tax can be remarkably costly.

It’s a lesson that Warren Buffett learned early on in his career. “If you aren’t thinking about owning a stock for ten years, don’t even think about owning it for ten minutes,” he once told investors. Patience is more than just a virtue, he might have added; it’s a strategy for investment success.

Discover the value of staying power at alliancetrust.co.uk/patience

Disclaimer

When investing, your capital is at risk. The value of your investment may rise or fall as a result of market fluctuations and you might get back less than you invested. TWIM is the authorised Alternative Investment Fund Manager of Alliance Trust PLC. TWIM is authorised and regulated by the Financial Conduct Authority. Alliance Trust PLC is listed on the London Stock Exchange and is registered in Scotland No SC1731. Registered office: River Court, 5 West Victoria Dock Road, Dundee DD1 3JT. Alliance Trust PLC is not authorised and regulated by the Financial Conduct Authority and gives no financial or investment advice.

Notes

1. The Profit from Patience Report, Alliance Trust, September 2022. About the research: Model based on two investors each making an initial stake of £10,000 in Alliance Trust in 1992 and then adding 10% of the average national salary every month afterwards. The Patient investor remains in the market throughout, while the Impatient investor sells 25% of their holdings whenever the market dips 5% in a single day and buys back in when the market recovers 10% in a single day using cash accumulated from monthly contributions, previous redemptions, and accrued interest. NB: The model uses the Alliance Trust share price as a proxy for the market.

Read the study here: https://www.alliancetrust.co.uk/patience Source: Alliance Trust

2. Alliance Trust conducted a survey via Opinium Research, who surveyed 2,000 UK adults between 23 and 26 August 2022. Of these, 730 were investors (defined as having a Stocks & Shares ISA, a general investment account, and/ or a self-invested/ self-managed personal pension).

In 2002, Warren Buffett warned that derivatives were “financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal”.

Nobody paid much attention at the time. Investment banks were busy constructing and selling an alphabet soup of derivatives: mortgages were sliced and diced into mortgage-backed securities (MBS); car, credit-card and corporate loans were bunched into collateralised debt obligations (CDOs).

The dangers of derivatives

The idea was that if “banks repackaged their loans, mixed them up and sold them to different people, it would diversify their exposure to risk”, as Gillian Tett of the Financial Times explained. “So instead of having a concentrated exposure to one type of risk, they’d be sharing that risk between them, making them stronger.” (They were also collecting fat fees from the repackaging process.)

She likened the system to butchers making sausages with meat from different cows.

The problem was that once it became clear that chunks of the new securities had gone bad – when the housing market turned, and the value of subprime mortgages slumped – it paralysed the entire system, just as a batch of poisoned meat that had been spread far and wide from a factory would cause people to stop buying sausages.

Financial institutions stopped trading with each other to avoid contagion; the world economy froze. A system designed to reduce overall risk had actually increased it.

The past few days have provided another example of this phenomenon. Defined-benefit pension funds have been using a strategy known as liability-driven investment (LDI) to match their assets to their liabilities. This has involved using derivatives and leverage, rather than simply buying bonds.

That backfired spectacularly last week as yields soared, prompting the Bank of England to intervene to temper a vicious cycle of selling and pre-empt systemic risk.

Goodbye to the Goldilocks era

A striking feature of both these blow-ups is that the people involved seem to have assumed that the benign conditions underpinning the investment techniques would last forever.

In the mid-2000s everyone thought house prices would go on rising. More recently, it was assumed that interest rates and bond yields would stay low forever or rise only slowly.

James Coney in The Sunday Times recalls an “awkward silence” when someone on the board of a final-salary pension fund he used to sit on asked, after a speech on the merits of LDI, what would happen if rates began to rise.

The entire financial world is now learning what happens when rates change quickly. Bonds are going down, ending a bull market that had lasted since the early 1980s.

Mortgage rates are going up; house prices are likely to go down as the supply of credit is squeezed.

Stocks have also become too accustomed to low rates. Dearer money reduces the present value of future earnings, which is especially awkward for companies where rapid-growth assumptions are priced in.

That explains why technology stocks are slumping – the Nasdaq Composite index has fallen by almost 30% this year.

However, with inflation far from vanquished, risk aversion rising and further rate rises on the cards, markets skewed towards value rather than growth stocks and offering a tempting dividend yield may prove resilient – markets like Britain, for example.

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.

On the face of it, tobacco giants Imperial Brands (LSE: IMB) and British American Tobacco (LSE: BATS) are some of the cheapest stocks in the FTSE 100. Imperial is the cheaper of the two. Its shares trade on a forward price-to-earnings (p/e) ratio of 6.4, while British American is on a p/e of 9.

As is so often the case, these stocks are cheap for a reason. The key question for investors is whether those reasons are sufficient to put you off investing in these companies.

The shares look cheap but this reflects growing uncertainty

To borrow a phrase from the US investor Warren Buffett, the best way to value a company is to analyse its future cash flows from now “until judgement day.” One big problem is that this is quite hard to do with tobacco companies.

Regulators are always looking for new ways to clamp down on smoking, and cigarette sales have been trending lower for decades. This makes it almost impossible to estimate how much profit these businesses will generate. Analysts might have some idea about potential profits over the next year or two, but after that, the picture becomes a lot more uncertain.

Then we need to consider ESG (environmental, social and governance) credentials. Tobacco companies have been eschewed by purpose-driven investors since the middle of the last century, when the link between smoking and cancer was first established. As more and more cash flows into ESG-linked funds it is likely money will continue to flow out of these companies.

Even if you’re an ESG sceptic (and there are plenty of reasons to be), it’s pretty obvious that unlike defence stocks or even oil companies, tobacco stocks are never going to make the cut, regardless of how leniently you draw the line. That means a certain amount of capital will almost always be unavailable to them.

However, while past performance is no guide to future returns, we can’t ignore the fact that tobacco stocks have produced absolutely outstanding returns for investors in the past. US company Altria (NYSE: MO), which owns the Marlboro brand in the US (Philip Morris (NYSE: PMI) is responsible for the brand internationally) is one of the best-performing stocks of all time.

It has returned roughly 17% a year for nine decades. An investment of $1,000 in the company in 1932 would be worth just under $1.4bn today (with dividends reinvested).

Companies are branching out to try and navigate growing uncertainty

The industry does have plans to get around these issues. Over the past decade, British American, Imperial and their peers have spent huge amounts of money on developing what the producers call “reduced risk” alternatives.

These products can be broadly grouped into two categories, “heat not burn” cigarettes, which are supposed to replicate the experience of smoking with fewer cancer-causing chemicals, and “vaping” devices such as electronic cigarettes.

Profits have remained elusive from these divisions as the companies have ramped up marketing and investment spending, but this is beginning to change.

British American announced in its 2021 results that revenues from new products, including “heat not burn” and e-cigarettes, jumped 51% last year. Meanwhile, losses fell by 9% to £100m. Based on its current trajectory, management thinks this division is on track to turn a profit by 2025 and generate revenues of £5bn.

Imperial is also making progress. In its latest trading update, published this morning, the group announced that adjusted operating profit in the first half of its fiscal year is expected to grow by a modest 2%, primarily as a result of reduced losses in its Next Generation Product arm.

The development of these new products will help Imperial and British American move away from their legacy tobacco and cigarette businesses, but it’s clearly going to be some time before these arms start producing meaningful profits and cash flow. It also seems unlikely in any case that these will allay ESG concerns.

Strong cash generation allows these firms to look after their investors

“Cash is king” is a cliche for a reason, and investors should note the cash-generative nature of tobacco companies’ operations, especially in the case of British American. Last year it earned an operating profit margin of 42%. Imperial’s was a far more modest 10%.

In total, British American generated £9.7bn in operating cash flow last year, allowing it to return nearly £5bn to investors and to reduce its debt. It is planning to return even more cash this year. Management has authorised a £2bn share buyback on top of the regular dividend.

Analysts at JPMorgan believe that there’s a chance of a buyback at Imperial as well. The company is looking to cut its debt to a range of 2-2.5 times net debt to earnings before interest, taxes, depreciation, and amortisation (EBITDA), and when it hits this target, analysts expect further cash returns.

Imperial’s latest trading update states that the firm’s leverage will fall below 2.4 times EBITDA at the end of the first half of its fiscal year. If leverage continues to fall, JPMorgan argues, the company may announce a buyback in November.

And even without including these cash returns, Imperial and British American are some of the highest-yielding stocks in the FTSE 100. The former yields 8.3% while the latter yields 6.7%. With yields like that, it is no wonder these companies are popular with income funds.

There are lots of good reasons why some investors might want to avoid the tobacco sector, but if you’re looking at it purely with an investment hat on, rather than considering the ethics of the business, the reality is that they have a lot of attractions. They generate a great deal of cash and look after their shareholders. So from that point of view, if you’re going to invest, my favourite is British American as it has a much bigger international footprint and is throwing more cash off than its smaller peer.

(Disclosure: I own shares in British American Tobacco)

Many of the world’s best-known investors have a similar rule when it comes to deciding where to put their money.

“Invest in what you know,” said Warren Buffett, the so-called sage of Omaha. “Never invest in an idea you can’t illustrate with a crayon,” added Peter Lynch, who built the Magellan fund into a $14bn giant. It is wise advice that helps explain the growing enthusiasm amongst many investors for fine wine.

Wine, after all, is a physical asset. You may not be a connoisseur – you may not even drink it – but wine is tangible and real. It could not be more different to the complex financial instruments that so many people are urging us all to buy. It is not difficult to understand.

Moreover, the investment returns that fine wine has delivered hold up remarkably well against other assets like stocks or gold.

(1)

The Liv-ex 1000 Index rose by 19% last year

(2)

That compares to an 18% return from the FTSE 100 Index of shares in the UK’s largest businesses – and a 4% loss in the US government bond market.

(3)

Nor was that performance a flash in the pan. Between its launch in 2004 and the end of Jan 2022, the Liv-ex 1000 index delivered a total return of 339.3%.

(4)

Indeed, the fact that wine has a track record of holding its value and more – in the face of inflation looks particularly alluring in today’s marketplace. The Bank of England now expects inflation to rise above 7% later this year.

Fine wine displayed a lower volatility over the last five years compared to major equity markets as well as US government bond and gold investments.

(

5)

For investors who don’t like sudden ups and downs, that’s quite something.

A passion investment

Still, while the investment case for wine is a strong one, Patrick Thornton Smith, Customer Experience Officer at Cult Wine Investment, argues that it would be a shame to think only in financial terms. “Fine wine is a unique asset class and has intrinsic attributes that appeal to the heart as well as the head,” he says. “Our customers are increasingly looking to us to expand their wine experiences to complement their investment journey.” It's a good point. Wine might be described as a “passion investment”. It is an asset class that you might consider for long-term investment performance and diversification – not putting all your eggs in one basket – even if you have no interest in the product. But it’s also a product that fascinates many people; the added attraction for many investors is the opportunity to find out more about wine – and to share experiences with other wine lovers.

For companies such as Cult Wine Investment, this is an key part of the story. It offers an accessible route into wine investment, with professional managers who will build portfolios of fine wines on behalf of investors according to their appetite for risk and financial goals; the minimum investment starts at £10,000, and the company takes responsibility for storing and insuring the bottles. But in addition, it offers a programme of experiences: investors get the opportunity to go to tastings, to travel to wine regions and to learn more about their passion.

For many investors, those experiences are just as enriching as the financial returns generated by their portfolios. Their investment is an opportunity to indulge their passion as well as to generate attractive long-term returns.

A toast to diversification

This isn't to suggest that investors should switch all of their money into wine. But it is an asset class that offers something different – an opportunity to diversify away from traditional investments such as shares and bonds, which often move in tandem – both up and down. Wine, by contrast, is what investment experts call an “uncorrelated” investment – its value tends to move more independently of what is going on in other asset classes.

Moreover, none of those traditional assets come with the chance to attend tasting sessions, join educational classes, meet up-and-coming producers or travel to new places. They lack the passion that an investment in wine can offer.

Wine also offers something else that no other asset class can match: you have the right to drink the wine you buy. As your portfolio of wine rises in value over time, one way to cash in some of your profits is to take cases of your wine out of the company’s storage to drink at home. That could be the perfect way to toast the success of your investment strategy.

1 Liv-ex +22.5% 01/31/21 - 01/31/22 www.liv-ex.com; Gold -2.69 01/31/21 - 01/31/22 www.investing.com; S&P500 21.57% 01/31/21 - 01/31/22 www.investing.com

2 Liv-ex 1000 +19.08% 31/12/2020 – 31/12/2021 www.liv-ex.com

3 FTSE 100 +18.44% 31/12/2020 - 31/12/2021; iShares 7-10y US Treasury Bond Index –4.13% 31/12/2020 - 31/12/2021

4 Liv-ex 1000 +339.3% 31/12/2003-31/01/2022 www.livex.com

5 Rolling 5-year standard deviation of monthly returns as of 31 Jan 2022 – Liv-ex 1000 1.10%, S&P 500 4.52%, FTSE 100 3.92%, iShares 7-10y US Treasury Bond Index 1.46%, Gold USD/oz 3.61%.

Past performance is not indicative of future results.

Warren Buffett famously said that his favourite holding period for equities was “forever”. Some of your equity investments will be short- or medium-term plays; you hope they appreciate, but you will need to monitor them regularly in case they do not develop as you hoped. Longer-term investments, by contrast, should be “forever companies”: those you can hold indefinitely because they will be so reliable that you will barely have to keep an eye on them at all.

These stocks are leaders in their sector or niche, capable of steady growth, and can withstand hard times because they have little debt or net cash. In most cases they will also produce reasonable dividends. We explore nine examples from eight sectors below.

The main selection criteria used are a record of profitable growth and rising dividends; investment in the future (through research and development, or R&D, capital expenditure and small bolt-on acquisitions); a leading position in a market sector or niche and low debt or net cash.

Certain sectors are more likely than others to contain “forever companies”. The nine examples that follow are from a wide array of sectors to reduce overall risk through diversification. Most of the companies selected have wide “moats” – enduring advantages that help fend off potential competitors – and many are dividend aristocrats, or companies that have increased their dividend every year for at least 25 years.

Pharmaceuticals

In this sector there are some excellent companies to choose from, such as AstraZeneca, Johnson & Johnson, Novo Nordisk, Merck and Roche. We highlight three: Merck, Johnson & Johnson with its 59-year record of dividend growth, and AbbVie. Merck (NYSE: MRK) just pips Johnson & Johnson as our first choice in this important sector because of its fine record of bringing new drugs to market. It also boasts a higher dividend yield.

For example, Merck’s cancer-immunotherapy drug, Keytruda, is the market leader in this segment and is predicted to be the world’s top-selling drug in 2026 with sales of $24bn – double those of the second-best-selling treatment.

In addition, Merck’s Molnupiravir, the first oral antiviral drug for treating Covid-19, was last week approved by the UK regulator. In clinical trials it halved the chances of hospitalisation or death among those most at risk of contracting severe Covid-19. Merck has a strong pipeline of new drugs concentrating on cancer treatments, vaccines and antivirals.

Merck has a wide moat because of its patented drugs, economies of scale and R&D investment of $10.2bn (it is one of the four highest R&D-investing pharmas). It has maintained or increased its dividend every year since 1986. The shares have risen almost fourfold since early 2009 and the dividend yield is 3%.

Consider also AbbVie (NYSE: ABBV) since it looks undervalued, with the market taking an overly pessimistic view of the effects of the patent expiry of its best-selling drug Humira, which tackles rheumatoid arthritis. AbbVie was the research-based pharmaceutical division of Abbott Laboratories, but was spun out as a separate company in 2013. If we include the record of Abbott before 2013, AbbVie has a 49-year record of increasing dividends.

AbbVie specialises in immunology, neuroscience and oncology and acquired Allergan (known for its Botox treatments) in 2020 to enhance growth in neuroscience and aesthetics. AbbVie’s moat is based on its patent-protected drugs, brands, powerful sales force and annual R&D investment of $6.2bn.

It has a strong position in rheumatoid arthritis through Humira, which has a thicket of patents running out in the US between 2023 and 2034 (for some manufacturing patents). A new rheumatoid arthritis drug, Rinvoq, has been approved with another in phase II-trials (the second of three stages of clinical trials).

Although some imitations of Humira could be launched by other firms in 2023, their manufacturers will not only need regulatory approval, but also agreement from AbbVie about manufacturing processes. Humira’s sales will fall over the next few years, but slowly, providing time for sales of Rinvoq to rise and a number of new drugs to complete clinical trials and be approved.

Health

US companies such as Abbott Laboratories, Intuitive Surgical and Medtronic dominate the global health sector, with Smith & Nephew being the only UK FTSE 100 example. We select Medtronic (NYSE: MDT), the largest by market value, as it has a very wide product range and the highest R&D in this sector ($2.5bn). Medtronic’s products cover cardiovascular, neurological, plus spinal and orthopaedic ailments, along with renal and nose and throat complaints.

The group also produces advanced surgical technology. Products include the world’s smallest pacemaker, which weighs only 1.75 grammes and can be inserted by keyhole-surgery directly into the right ventricle of the heart. The battery lasts between eight and thirteen years and the device is MRI safe so the wearer can have full-body three-Tesla MRI scans. Medronic also makes the world’s smallest implantable spinal cord neuro-stimulator, which automatically delivers the right dose at the right location as the pain shifts with different body positions.

Medtronic has a wide moat because of its dominant position in patented, highly engineered devices for chronic diseases. It has increased its dividend for 43 years in a row and the shares are up by a factor of 4.3 from their 2009 level.

Agriculture

In this field the pick of the bunch is farming-equipment specialist Deere & Co. (NYSE: DE). Deere has one of the world’s most recognisable brands and makes machinery for the agriculture, construction, forestry, landscaping, golf and military sectors. Deere’s respected brands command strong loyalty among its customers, who value its state-of-the-art products and reputation for both reliability and service through its global dealer network. These advantages, along with a $1.3bn yearly R&D investment, give it a wide moat.

Deere is now working on a smart-industrial strategy of intelligent, connected machines and applications using artificial intelligence (AI) that it expects will revolutionise production systems in agriculture and construction.

It acquired Bear Flag Robotics earlier this year to accelerate its fully robotic-tractor programme. It has maintained or increased its dividend every year since 1987. The shares are up almost 22 times since early 2000.

Food and drink

There are a number of well-established food companies with strong market positions, such as McDonald’s, Nestlé and Unilever, but we opt for drinks giant Diageo (LSE: DGE), given its wide product range and strong brands. Diageo is a global industry leader with a wide moat due to its scale, vast product range and very recognisable brands, such as Johnnie Walker, Lagavulin, Gordon’s, Guinness and Smirnoff.

Almost one quarter of sales come from Scotch whisky. The requirement to age whisky for years before sale is a substantial barrier to new entrants into the subsector and sets Diageo apart from most other consumer-staples companies. Diageo boasts 23 years of rising dividends. The shares are up 9.6 times since 2000.

Precision engineering

The UK is lucky to have some excellent precision-engineering companies, such as Halma, Renishaw and Spirax-Sarco Engineering. We select Halma (LSE: HLMA), given its outstanding record of profitable growth. Its products cover the areas of safety, health and environmental protection, and range from devices to detect gas to water-pipeline leakage and ambulatory blood-pressure gauges.

I first bought the shares at 125p in early 1999 and they now stand at around 3,000p, up 24 times. The dividend, moreover, has risen by 5% or more for 42 years. By 2020-2021, the yield on my original investment was 14.1%. Halma is a good example of a “forever firm”, providing capital growth and income.

It also highlights another important point. If you have confidence in a “forever company”, you need to stay with it to get the full benefits. Halma’s mix of businesses has evolved over the last decade as revenue increased from £459m in 2009/2010 to £1.32bn in 2020-2021, the 18th consecutive year of record profits. Over this period the medical and environmental analysis divisions grew from 38% of revenue to 52%, while industrial safety fell from 22% to 14% and infrastructure safety fell from 40% to 34%.

This optimisation of the product mix is a key characteristic of “forever companies”. Halma’s decentralised operating model makes it a very attractive acquirer for business owners and this helps it continue to find good, bolt-on acquisitions.

Scientific instruments

The UK has a number of small and medium-sized but high-quality scientific-instrument companies, such as Judges Scientific, Oxford Instruments and SDI. But we select the US company Thermo Fisher Scientific (NYSE: TMO) as our “forever company” in this sector because of its large size, wide range of products and strong position in a substantial segment of the market. It has become a one-stop shop for scientific instruments in key industries such as pharma.

The product range covers biotechnology (genetic analysis, antibodies and gene-editing), instruments (electron microscopes to spectrophotometers), laboratory equipment (such as centrifuges) and laboratory supplies (pipettes to water testing).

It has the largest sales force in the industry, an unparalleled distribution network, strong customer relationships and invests $1.2bn per year in R&D. These advantages give it a wide moat. It has maintained or hiked its payout for a decade. The shares are up 19 times since early 2009.

Financial services

In financials we have a wide choice of banks, insurance companies and credit-card providers. But we favour financial-data and research group S&P Global (NYSE: SPGI), thanks to its multi-decade record in providing credit ratings (essential for bond issuance) and its key stockmarket indexes, such as the S&P500. These features give it a wide moat. S&P has a record of maintained or increased dividends going back to at least 1986. Dividends have risen every year since 2001 and the stock is up by a factor of 21 since early 2009.

There is a very wide choice of companies in software, hardware, internet and AI technology My pick is Alphabet (Nasdaq: GOOGL), Google’s parent company. Alphabet has a strong market position in addition to a record of profitable growth and innovation in launching new products such as Android, Maps, Gmail, YouTube and new businesses such as self-driving cars.

Alphabet, through its Google subsidiary, has a dominant position in the growing online-advertising market and gained an early foothold in smartphones through its Android operating software. Its wide moat is based on its market position and intangible assets such as its brands, algorithms and accumulated data on consumers.

Alphabet is the world’s largest R&D investor with a 2020 outlay of $27.6bn. It is one of the most advanced AI companies and acquired the British AI outfit DeepMind in 2014 (the company whose AlphaGo system in 2016 beat the world’s champion player at the complex game of Go).

The shares are up almost 20 times since the start of 2009, but it pays no dividend, preferring to invest in share buybacks instead. Alphabet has net cash of $123bn.

Two key priorities for investors

There are two general issues to keep in mind when investing in “forever companies”: diversification and value. It is wise to hold a diversified set of “forever firms”, since even well-established blue-chips can come unstuck.

For example, Lloyds Bank was a seemingly solid dividend stock until the financial crisis. The share price was around 393p in early 2007, but fell to 30p in March 2009 and since then has only risen to 50p.

And while the dividend in 2007-2008 was 23.33p per share, in the dividend in 2018-2019 was still only 3.21p. Another example is General Electric, which entered the 21st century as America’s most valuable corporation only to lose its way. The shares are down from $447 in 2000 to $106 recently, with a dividend yield down from 8% in late 2009 to 0.3% now.

The second issue is valuation. Given the quality of the nine “forever companies” described above, one would not expect them to be selling at bargain prices, and indeed none of them are. Since stockmarkets in most developed countries, especially America, are currently at high price/earnings (p/e) ratios compared with historical levels, with the US market particularly exalted, one strategy would be to wait for the next general market decline and then invest in several “forever companies” at lower prices.

However, markets can often stay high for longer and even move higher, despite pundits predicting a fall. The safest strategy is usually to feed funds into the market slowly using Isa allowances and look first at the stocks with lower p/es. We will therefore give the p/es and dividend yields for each of our companies together with comments on growth records and leave investors to decide how and when to invest.

In terms of revenue growth, the leader is Alphabet (revenue rose by 102% between 2016-2020), followed by AbbVie (79% between 2016 and 2020), Thermo Fisher (76%, 2016-2020), Halma (66.9%, 2017-2021), Deere (33.7%, 2016-2020), Merck (20.6%, 2016-2020), S&P Global (12.8%, 2016-2020), Diageo (5.7%, 2017-2021, and Medtronic (1.4% 2017-2021).

Some of the growth is organic, some by acquisition – for example, AbbVie’s acquisition of Allergan in 2020 increased its sales growth figure and Thermo Fisher has made several acquisitions.

AbbVie has a forward p/e of just 8.4 for 2022, with a current dividend yield of 4.4%; Merck has a p/e of 12.3 for 2022 with a current dividend yield of 3%. The difference reflects the greater uncertainty about AbbVie’s ability to replace revenues from Humira in time with new drugs emerging from its pipeline. In the health sector Medtronic has a p/e of 21 for 2022, falling to 19 for 2023, along with a current dividend yield of 2.1%.

Diageo has a forward p/e of 28 and a dividend yield of 2%. Deere has a 2022 p/e of 15.5 with a yield of 1.1%. S&P Global is on a 2023 p/e of 28.2 and a yield of 0.7%. Halma is selling for 43 times its estimated earnings for 2023-2024 and yields 0.6%. Thermo Fisher has a p/e for 2023 of 27.6 with a yield of 0.16% and Alphabet a 2022 forward p/e of 26, but no dividend. Nevertheless, the company boasts net cash of around $123bn and regularly buys back shares.

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.

“The economics of investing in bonds (and most financial assets) has become stupid”. That’s the latest message from Ray Dalio, one of the world’s most successful hedge fund managers.

Dalio is the founder of Bridgewater Associates, which is one of the most successful hedge fund groups in the world. That doesn’t mean Dalio gets everything right any more than Warren Buffett gets everything right. But it does indicate that his opinion is worth at least a listen.

So what’s he suggesting instead?

The bond bull market might already be over

The bond bull market of the past 40 years may well be over. The real (after-inflation) yield that you can get on bonds is the lowest ever right now, says Dalio. If you buy most developed-world sovereign bonds then “you will be guaranteed to have a lot less buying power in the future”.

The big risk now is that the world owns a great deal of this debt, just at the time when it’s more overpriced than ever before. This is all part of a very long cycle, notes Dalio, which has been driven to its climax by the efforts of governments to spend their way out of the Covid-19 recession.

Moreover, there’s another cycle at play – that of today’s superpower, the US, being challenged by a rising power, China. It’s the fact that the US has been top dog for such a long time that has “allowed the US to overborrow for decades”. US dollar bonds account for “over a third of global bond holdings”. A long way behind that, you have euro-denominated bonds.

Today however, China is on the rise as a competing superpower. And increasingly, big international investors are starting to put some money into Chinese bonds. Not much – “only about 6% of allocations in global portfolios” – but it’s a start.

This reflects a lot of different factors, including the fact that Chinese bonds yield more. But it’s also because the Chinese financial system is developing, and because the clear long-term desire of the Chinese authorities is to internationalise the yuan, and turn it into a reserve currency.

To my mind, that has interesting political ramifications beyond the whole “rise of empires” thing. Can China really internationalise the currency while maintaining the level of control over the economy and its own population that it desires? I’m not sure. That’s probably one reason why it’s so keen on digitising the yuan as well. But this is all a separate story for another day.

In any case, Dalio makes the point that we’ve got all of these big issues coming to a head right now. There are a limited number of ways for central banks and politicians to manage it. And that will have a big impact on investors.

So what can you invest in now?

Now, it’s worth bearing in mind that plenty of people thought that Japanese government bonds couldn’t go any lower in the 1990s and 2000s, and they did. So, while high-conviction pieces like this can be very compelling reads, you have to remember that lots of confident forecasts end up going nowhere.

But given where we are right now, I also think it’s a mistake to dismiss what seem like extreme views. It’s very difficult for us to see how far we’ve already come in terms of what would have seemed “unthinkable” at the start of this century. Central banks printing money? Unthinkable. Governments sending money direct to individuals? Unthinkable.

What’s the next “unthinkable” thing that will happen? Well, one very obvious option is for central banks to ignore inflation and instead use their money-printing and regulatory powers to hold yields on debt down, while the owners of said debt pay a huge inflation tax.

There is also, says Dalio, the risk of capital controls (in other words, you won’t be able to send your money around the world as easily because it’ll be needed at home) and also much higher taxes. He’s writing for a US audience primarily, but it’s easy to see all of these things applying to most developed economies - potentially.

So what on earth can you invest in at this point? Dalio concludes that “a well-diversified portfolio of non-debt and non-dollar assets along with a short cash position is preferable to a traditional stock/bond mix that is heavily skewed to US dollars”.

What does that mean? Overall, Dalio is saying that you shouldn’t have as much exposure to bonds as might once have been deemed traditional. He’s also arguing that US investors shouldn’t have as much exposure to the US dollar as they probably do.

For UK-based and private investors, this take isn’t quite as helpful. Dalio isn’t keen on cash because he thinks it’ll be devalued. To my mind though, all private investors need cash because of the “optionality” (that’s a fancy word for flexibility) it gives you. So I wouldn’t worry about that too much.

In terms of bonds, as I’ve said before, no one gets everything right. But it’s certainly not a good time to be “overweight” them in your portfolio.

In the “real” assets side of things – we are keen on UK stocks right now because they’re cheap relative to the rest of the developed world. I’d also still be keen to hold some money in gold – despite the risks of capital controls – because we’re not there yet (and it’s worth noting that unlike the US in the 1930s, the UK has never made owning gold illegal)

Also note that Dalio is specifically bullish on Asian emerging countries versus “assets in the mature developed reserve currency countries”. We have an in-depth piece on one very specific and dynamic emerging Asian country – Vietnam – and how to invest in it, in the current issue of MoneyWeek magazine.

If you’re not already a subscriber, get your first six issues – plus a beginner’s guide to bitcoin – absolutely free here.

On Saturday, Joe Biden’s big stimulus package cleared its first major political hurdle. The US House of Representatives gave the go-ahead to the $1.9trn coronavirus relief package. It now needs to get passed the Senate. The US has already spent 16.7% of GDP on measures to help the economy, notes Capital Economics. This would push it up to as much as 25%. That’s way bigger than in the eurozone, for example. It’s small wonder that investors are starting to worry about inflation.

As Neil Shearing of Capital Economics points out, not only is fiscal stimulus bigger in the US, the “degree of economic slack” is probably smaller than in the eurozone too. So you’ve got a big demand hit coming, and supply isn’t necessarily there to handle it. So you can see why bond investors are a bit rattled.

“Bonds are not the place to be these days”

Markets have calmed down somewhat this morning, but there’s every chance that it’s just a bit of calm before the next panic. None other than Warren Buffett provided a bit of perspective in his latest annual letter at the weekend, and it wasn’t comforting: “Bonds are not the place to be these days. Can you believe that the income recently available from a ten-year US Treasury bond – the yield was 0.93% at year-end – had fallen 94% from the 15.8% yield available in September 1981?”

That shows how long this trend has been running for. It also gives you some sort of idea of how disruptive it might be when it reverses. However, it’s also why we shouldn’t assume that central banks will take it lying down.

Some notable action has been taking place in a market that most of us don’t often pay much attention to – the Australian government bond market. The Reserve Bank of Australia today “doubled down on bond purchases”, as Bloomberg reports. The central bank decided to buy more than $3bn-worth of longer-dated Aussie government bonds. That followed on from a burst of extra spending at the end of last week.

What does all that mean? The Australian central bank is telling markets that it won’t allow interest rates to go up too quickly or by too much. This is what’s known as “yield curve control” or YCC, and it’s an acronym you should probably get familiar with, because you’re going to see a lot more of it in the next few months, all over the world.

Yield curve control is likely to spread

In the old days (pre-2008, or GFC (global financial crisis) Year Zero as we may one day rebrand it), central banks focused on setting short-term interest rates. Long-term ones (in other words, government bond yields) were allowed to please themselves, and served as useful indicators of market expectations. Gradually, in the post-GFC era, central banks started to control interest rates further and further into the future, using quantitative easing (QE) to buy longer-dated government bonds. YCC is the next logical step. It’s something the Bank of Japan has already been doing for a long time.

The big difference between YCC and quantitative easing (QE) is this: with QE, the central bank says it will spend a certain amount of money on bonds. Driving down interest rates on the bonds is part of the process, but there is no explicit target. With YCC, the central bank specifically says that it wants interest rates (in other words, bond prices) to stay at a certain level, and that it will buy (or sell) as many bonds as necessary in order to get to that level.

Several central banks have already started doing this. In 2016, for example, the Bank of Japan (BoJ) decided to use YCC to keep the yield on the ten-year Japanese government bond at around 0%. It has worked, in that investors realise the BoJ is serious, and therefore don’t try to test its resolve by pushing out of the 0% area. In turn, that means the BoJ hasn’t had to buy as many bonds as it might otherwise have done using QE. Meanwhile, in March, as central banks reacted to the coronavirus going global, Australia adopted a more limited form of YCC, targeting an interest rate of 0.25% on three-year bonds.

Both the Federal Reserve and the Bank of England have treated the recent surge in yields as more of a healthy correction. That’s not necessarily a bad idea, given that yields are only now back to where they were just before the pandemic upturned everything. You could argue that in effect, we’re only back to “normal”. But of course, it’s “normal” plus a load of economic damage plus a load of government spending that we wouldn’t otherwise have had. I suspect that it’s only a matter of time before investors start to push against this apparent comfort zone.

I’ll be interested to see how long the apparent insouciance lasts before the Fed gets on board with its Australian and Japanese peers. Once it becomes clear that interest rates will be held down artificially, that’s when the inflation trades will really start to take off.

We’ll have more on this in the coming issues of MoneyWeek magazine. If you’re not already a subscriber, get your first six issues free here (plus a special free bonus downloadable report on bitcoin).

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.

Howard Marks of Oaktree Capital is a highly successful distressed-debt investor, whose regular memos on markets and investing are widely regarded as “must-reads”. His latest piece addresses the “value” versus “growth” debate. He raises some good points on the debate, worth highlighting here – but there’s another interesting point about his letter, which I’ll get to later.

As Marks notes, value investing has its roots in an era when information on companies was much harder to come by and investment management was “a cottage industry” rather than the massive business it is today. As a result, in the early days it was easier to hunt down companies that were obviously cheap – trading for less than their book value (see below), for example. Now that the hunt for information is far more competitive, it stands to reason that, outside of market panics, it should be much harder to find such obvious bargains. Moreover, the pace of change today is far greater than it was in Warren Buffett’s early days, for example.

This means that value investors need to look beyond using valuation ratios that can be readily analysed by “a finance student with a laptop” and also avoid being wedded to the idea that “what goes up must come down”. Instead, they should take a lesson from growth investors and be willing to “thoroughly examine situations – including those with heavy dependency on intangible assets [see below] and growth into the distant future – with the goal of achieving real insight”. In short, narrow value investors run the risk of being too dismissive of innovation and of missing out on stocks that look overpriced today, but are in fact bargains relative to their prospects.

It’s a failing I daresay many MoneyWeek readers recognise (I certainly do) and Marks is right to say that investors need to take a range of approaches to valuation, rather than relying on just one metric or strategy.

However, there’s another reason why Marks’ letter is interesting – the timing. When bull markets approach a top, there’s a phenomenon known as “bear capitulation”. This is where well-known, long-term sceptics finally throw in the towel and admit they might be wrong. They typically do this just in time to see their scepticism proved right.

Marks is an experienced investor. While his observations on the evolution of value are well expressed, they’re not new. The fact that he presents these views as something of an epiphany, combined with the fact that he’s previously been, if not exactly bearish, then certainly cautious on the current boom, makes me think that his shift in sentiment is yet another indicator to add to the large collection we already have to support the view that today’s bubble in US tech stocks is running on borrowed time.

When you start investing, one of the first concepts you’re likely to encounter is ‘value investing’. Like many terms in investment, “value” is not easy to pin down precisely.

As Charlie Munger, the business partner of legendary US investor Warren Buffett, put it: “All investment is value investment, in the sense that you're always trying to get better prospects than you're paying for.” This is true, but not very helpful. So let’s be more specific.

Value investors look for solid companies that are trading for less than they are worth.

“The term we often use is durable businesses,” says Nisha Thakrar, product specialist at Nedgroup Investments who works on the firm’s Contrarian Value Equity Fund. “We’re trying to find ‘forever companies.’”

The team selects from a list of approximately 500 stocks they feel are worth considering as investments given their long-term prospects, but buying or selling any stock within this longlist is based on its value at any given time.

While it fell out of favour for much of the period between 2008 and the present day, value investing is coming back into vogue. So what do you need to do to become a value investor?

How does value investing work?

Many value investors base their investment decisions on a calculation of a stock’s ‘intrinsic value’ and will look to invest in stocks that are trading below this – often accounting for a ‘margin of safety’ as a further buffer. So if a stock is deemed to be worth £2 and the investor wants a 30% margin of safety, they will only buy it if its price falls to £1.40 or lower.

There is no single way to define or calculate intrinsic value (if there were, the stock market would be a much less dynamic place). So different value investors will all use different approaches. Nedgroup's Contrarian Value Equity team, for example, looks at companies’ growth trajectory over the next three to five years, and looks for evidence they can generate annualised returns of 8-10% over that time period.

What unifies value investors is that their approach will be based on company fundamentals’ – which broadly refers to the price at which a stock trades at compared to the amount of money the company makes (or, in some instances, is on course to make). Most value investors also pay close attention to company balance sheets.

“The natural questions are what’s the balance sheet strength? Are these cash-rich companies? Are they indebted? What’s the structure of the business? What are the core drivers of revenue, and how diversified are those?” says Thakrar.

How does value investing differ from growth investing?

This is in contrast to ‘growth’ or ‘momentum’ investors, who are broadly speaking less focused on fundamentals and more focused on market sentiment and narrative. They want to buy the stocks that are increasing in value and which are likely to do so long into the future, regardless of how profitable (if at all) they are right now. Companies that have the potential to grow in future tend to trade at a substantial premium, so value investors will often steer clear.

All of this is a spectrum, though, and there are overlaps between these styles: as Munger says, all investing is value investing to some extent. Growth investors buy growth stocks because they think they’re cheap compared to their long-term value, and might look at fundamental metrics like the forward price:earnings ratio (forward P/E), which measures a company’s price divided by the profits analysts expect it to post over the next 12 months.

Value investors are likewise not oblivious to the idea that good companies grow over time; they might well find agreement with growth investors that particular stocks make attractive long-term investments at their current price.

So rather than see these two labels as diametric opposites, it can be helpful to view them as different perspectives or approaches to solve fundamentally the same problem; trying to decide where to invest your money.

What is contrarian investing?

Contrarian investing is in many respects similar to value investing, in that both seek out companies that are undervalued by the market.– but each has a subtly different way of going about it.

Value investors look at company fundamentals to find solid, reliable businesses. Contrarians, on the other hand, actively focus on companies that are being disregarded for one reason or another.

Take Google’s parent company Alphabet (NASDAQ:GOOGL). This is part of the ‘Magnificent Seven’ group of big tech megacap stocks, which many investors believe are overvalued. Alphabet trades at over 30 times trailing earnings. In some respects, it is as far as you could get from a traditional ‘value’ stock.

Yet, it was the top holding in Nedgroup’s Contrarian Value fund with 7.5% of the portfolio as of 31 December. As Thakrar explains, buying stocks when the market disregards them is key to success for contrarian investors.

“We bought Alphabet when it was probably still called Google, in 2011,” she says. “At the time, Google was facing this existential threat of how it would pivot its business from desktop to mobile.” Nedgroup bought the stock because of its deep moat, resilient ad-revenue business, its impressive management team and strength of its balance sheet.

"Since then, the company has expanded into a range of revenue drivers beyond its core search business which are making a meaningful contribution to growth," said Thakrar.

The market wrote Google off at the time, but in retrospect, it seems obviously wrong to have. Nedgroup’s investment has increased seventeen-fold.

Contrarians will also look to enter any given market at a time when most investors are shunning it; hoping, in doing so, that they can buy low, then sell high once sentiment recovers.

What are the risks of value investing?

There are two big risks for value investors. One is that they buy companies which will never regain their past glory, and that are cheap for a reason; they might, for example, have had their business model destroyed by new technology. These are known as “value traps”. Their business is on a downward trend and they are only cheap because the rest of the market has recognised this in advance.

The second risk is summed up in the apocryphal quote from John Maynard Keynes, who as well as being the 20th century’s most famous economist, was also a brilliant investor. As Keynes said: “The market can remain irrational for longer than you can remain solvent.”

In other words, sometimes even good quality value stocks remain out of favour for longer than the average investor can endure holding onto them, in the face of massive underperformance. This highlights the most important trait for the value investor: patience.

Legendary contrarian investor Michael Burry notably ran out of patience in October 2025, when he wrote to his investors explaining that he was closing his hedge fund Scion Asset Management.

"My estimation of value in securities is not now, and has not been for some time, in sync with the markets," Burry wrote.

Even for the professionals, value investing is not easy. Inexperienced investors may want to stick to funds that suit beginners while getting started in investing. But once you have a bit of confidence, looking at company fundamentals can be a rewarding approach to deciding which stocks to buy.

There is a saying on Wall Street: “the definition of a long-term investment is a short-term investment that has gone wrong”. Good traders cut their losses on mistakes and so should good investors, but good investors also hang onto their winners. “Our favourite holding period is forever,” according to Warren Buffett.

Picking the stocks that will be great investments for 20 years is easier said than done, as a glance at the constituents of the FTSE 100 20 years ago shows. Many have not survived. Some of the major tech stocks of 20 years ago have been winners, but have also provided a gut-wrenching roller-coaster ride. Note that the entire gain in the US stockmarket since 1926 is due to the best 4% of listed companies.

Picking investment trusts for the next 20 years is much easier. A diverse portfolio will reduce the impact of poor investments. A good manager, while keeping portfolio turnover low, will navigate the changing opportunities and threats along the way, whether these stem from valuations, the overall economic outlook, or individual businesses. All the investor has to do is pick an area of the market offering attractive long-term potential and find a trust with the right record, investment thesis and management.

Good managers can lose their touch or prove to have been lucky rather than skilful. They also move on and their successor may or may not be able to follow in their footsteps. Seemingly attractive long-term prospects may turn out to have been a mirage. If so, sell. But nothing goes up in a straight line, so expect setbacks and even long periods of dull performance when fundamental value catches up with the share price.

In my first article for MoneyWeek in September 2002, I recommended Baillie Gifford Japan and Invesco Perpetual UK Smaller Companies. The former has since risen ninefold; the latter, with dividends reinvested, eightfold. I still hold the former, but switched the latter into BlackRock Smaller Companies ten years ago: Invesco’s manager changed and the BlackRock trust was trading on a much higher discount to net asset value (NAV). This added 25% to returns over the last five years. Both trusts are in my top-five for the next 20 years, along with other long-standing favourites.

Baillie Gifford Japan Trust (LSE: BGFD)

BGFD has rather lost its shine since Sarah Whitley retired as manager three years ago. It is now the only Baillie Gifford trust that does not top the performance table in its sector. But that may prove temporary as its performance has picked up strongly in recent months. The portfolio is divided into “secular-growth” (51%), “internet-related” (31%) and “automation-related” (14%) stocks. Annual portfolio turnover is just 21%, with six new holdings and eight sold last year in a total of 70. The investment opportunity in Japan is one of the best in the world, yet it is under-represented in most global funds. Corporate Japan, galvanised by the arrival of Prime Minister Shinzo Abe in 2012, has been steadily changing in recent years. Profit margins have risen from 4% to 6%, companies are concentrating on their core businesses and are more focused on creating value for shareholders. Still, the Topix index is trading at just 17% above book value (mostly tangible assets) and yielding 2.4%. Earlier this year, it was on its lowest price/earnings (p/e) ratio for 50 years. Warren Buffett recently invested $6bn in Japanese companies – surely a green light for sceptical investors.

BlackRock Smaller Companies (LSE: BRSC)

BRSC, which focuses on British small caps, has outperformed its benchmark, the Numis Smaller Companies index, for almost 18 consecutive years. The index has in turn eclipsed the broader market by an annual 3.2% for over 60 years. Still, the index has lagged a weak UK market this year. Over three years the index is down by 13%, while BRSC is up by 4%, so UK smaller companies are due a return to favour.

Investors’ current scepticism is reflected in BRSC’s lagging share price, which is now at a 15% discount to NAV, while the yield is 2.7%. The style is growth and quality, for which the manager, Roland Arnold, is prepared to “pay a slightly higher multiple of earnings”. The number of holdings, at over 120, is high but the top-ten holdings account for 20% of the portfolio and the top 50 for 62%. Arnold believes “this environment will prove to be a fantastic opportunity”.

Polar Capital Technology Trust (LSE: PCT)

I didn’t have the nerve to include PCT in the 2002 article, having held it all the way up and all the way down the dotcom bubble. This was clearly a mistake, as the share price has since multiplied 26-fold. Allianz Technology Trust, which I also hold, has outperformed over five years (328% versus 292% in NAV terms), but I am happy to hold both. PCT has over 100 holdings. Its manager, Ben Rogoff, seeks to invest in the high-growth phase – when “companies are apparently expensive but revenue and earnings forecasts are wrong” – before selling out before maturity, when companies become value traps. He avoids “blue-sky pre-revenue companies which often end in disillusion”.

It may be tempting to avoid a technology specialist trust for now and wait for a better opportunity, but the sector could go a lot higher before there is a meaningful setback. There is no sign that the industry’s phenomenal earnings growth is coming to an end, so a forward price/earnings (p/e) multiple well into the 20s is justified. There are certainly companies to avoid and accidents waiting to happen, but the portfolio’s diversity means that the impact of the mistakes should be small.

Worldwide Healthcare Trust (LSE: WWH)

The case for long-term investment in healthcare is compelling. It is based on rising populations, people’s desire to live a long and healthy life, their readiness to see a disproportionate part of their increasing prosperity spent on healthcare and the accelerating pace of innovation in the industry. Against that, affordability is finite, innovation takes time and is risky, regulators often drag their feet and the sector is a perennial political football. This means that performance is cyclical with periods of strong performance followed by dull phases that can last years.

I have held WWH since its launch in 1995, since when its share price has multiplied 35-fold. At first it invested only in pharmaceutical and biotechnology companies, but its remit was broadened to include medical equipment, healthcare services and providers. Those wanting a trust at the sharp end of innovation should consider its sister trust, Biotech Growth (LSE: BIOG), but although BIOG has performed much better over the last year, the five-year record is similar.

Finsbury Growth & Income Trust (LSE: FGT)

I have held FGT for even longer, though not continuously. The strategy of its manager of nearly 20 years, Nick Train, is to hold the shares of companies whose brands and business franchises give them longevity, mainly in consumer goods (such as Unilever), financial services (London Stock Exchange) and services (publishing group RELX). These companies generate reliable long-term growth throughout economic cycles.

There are just 25 holdings. In February the average age of the companies in the portfolio was 148 years; 80% of the portfolio is listed in the UK, but many of the holdings have a major international presence. Train is a keen follower of the Buffett principle of holding stocks forever, so portfolio turnover is between zero and 10%. In one year it was just 0.5%, equivalent to turning the portfolio over every 200 years.

As a result, Train has had the time to climb all of Scotland’s 282 Munros (mountains over 3,000ft). The trust’s five-year performance of 69% is 50% ahead of the All-Share index, yet the shares trade 12% below their 2019 peak, providing an opportunity for new investors given that the companies in the portfolio continue to prosper.

Consider these too

A portfolio of trusts for the next 20 years should also include an emerging-markets one. JP Morgan Emerging Markets Investment Trust (LSE: JMG) is the most consistent, having returned 112% over five years, almost double the MSCI emerging markets index, yet it still trades on an 8% discount to NAV. Exposure to private equity is also essential. HG Capital Trust’s (LSE: HGT) focus on technology makes it the star of the sector with a five-year return of 137%, although the discounts of an average 27% to NAV of the funds of funds, such as Pantheon International (LSE: PIN) and HarbourVest Global Private Equity (LSE: HVPE), will tempt bargain-hunters.

Finally, no portfolio should be without a core of high-quality global funds. The phenomenal performance of the sector’s £14bn giant, Scottish Mortgage Investment Trust (LSE: SMT) – up by 338% in five years – makes rivals seethe with envy. Its portfolio is made up of high-growth, technology-driven companies with an increasing exposure to private equity. Of course, these companies look expensive, but that doesn’t make them overpriced. It’s my largest holding. A long way behind, but still boasting an impressive performance from a lower-octane approach to growth, are Scottish Mortgage’s sister trust Monks Investment (LSE: MNKS), Mid Wynd International Investment (LSE: MWY) and Martin Currie Global Portfolio (LSE: MNP).

The advantage of a well-chosen portfolio of trusts is that you can leave it alone for long periods of time; a busy quarter might be two trades. There is no need to worry about the underlying stocks – that’s what the managers are paid to do. Just keep an eye on the overall performance from time to time. Resist the temptation to take profits in order to reinvest in the laggards.

If you are bothered about market volatility, just check prices less often. Not all the trusts will prosper for 20 years, but don’t be pushed around by market sentiment; that’s the way to buy at the high and sell at the low. Managers will come and go, but directors are not fools and should ensure continuity. If it’s worked for me, it can for anyone.

Warren Buffett once quipped that “diversification is protection against ignorance. It makes little sense if you know what you are doing.” Like many experienced, successful investors he has made huge profits by focusing on a small bunch of big assets and sectors he knows very well.

Private investors looking to emulate the Sage of Omaha could consider taking this approach to its logical conclusion and concentrating on just one asset: a single property. That is the idea behind a new real estate investment trust (Reit) launching on a new, property-based, stock exchange called the International Property Securities Exchange (IPSX).

The BBC meets Harvey Nichols

This platform aims to make property investing more popular and accessible by launching single-property Reit structures, with the first out now: the Mailbox Reit, based in the heart of Birmingham’s central business district. If you live in that city or visit it regularly, you’ll probably know it as the local office for the BBC and Harvey Nichols.

Unlike with many diversified real-estate funds, if you invest in this new Reit you’ll be able to keep a sharp eye on how this single large property development performs over the next few years simply by paying a visit on a regular basis.

The idea of a single-building Reit isn’t entirely new; they have existed in the US for some time. Now the IPSX is seeking to give private investors a regular quarterly income from owning just one building. The new exchange has been taking shape for several years now, but it needed the right building to kick off with, which is where the Mailbox comes in.

It is owned by a shareholder in IPSX, M7 Real Estate. Other IPSX investors include blue-chip names such as British Land. The Reit is looking to raise £62m in total via 100p shares, with a target dividend of 5p a share paid quarterly (from the first quarter of 2021).

After the initial public offering (IPO) on 21 October, M7 will continue to own a 46% stake in the structure, using the proceeds for conversion of retail into offices and to reduce debt so that the loan-to-value (LTV) ratio is below 40%.

The annual rent roll is £9.8m and although the building was bought last year for £190m, it was recently valued at £179m. Covid might well put further downward pressure on that valuation. The building is currently “multi-use”: offices comprise 47%, car parking 21.2% and retail 36%. Unsurprisingly there have been difficulties collecting rent from some of the leisure operators (which include a cinema) and retailers.

According to the prospectus, “Rental receipts for the March 2020 Quarter Day were 82.3% of rent due and ... 68.7% of rent due for the June 2020 Quarter Day as at 6 August 2020. This compares with rent collected for the December 2019 Quarter Day of 96.2%”.

Home-working affects the outlook

Most of the large property investors I’ve talked to tend to have firm opinions – negative and positive – about this well-known Birmingham development. But they all warned that the new shift towards working from home might have unpredictable effects. There is also considerable scepticism among many of these institutional investors about the idea of single-property assets, with most suggesting that diversified approach through a typical Reit works best.

Then again, many large institutional investors have long been happy to own single buildings (within a portfolio) and assuming that the IPSX does get more issues away – there’s talk of an immediate pipeline of five further projects – then investors should be able to assemble their own portfolio of income-producing real assets.

Investors may also need to keep an eye on the practicalities of this new idea, notably the trading of the shares. I am hugely reassured that the market makers are three very respectable institutions – WH Ireland, Panmure Gordon and Peel Hunt – all using the Crest settlement system. IPSX also says it is heavily engaged with wealth advisers and retail platforms so that private investors can access the IPO.

The gaggle of market makers should also bolster liquidity in the secondary market though I would suggest that as this is a new, untested, idea, don’t be surprised if the bid-offer spread is a wider than for many mainstream shares, possibly in the 2% to 5% region. And if the working-from-home trend intensifies and the lockdown persists, I would not be surprised if this Mailbox Reit trades at a discount for some time.

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.

Editor’s note: John’s away this week so today we have an excerpt from his book on contrarian investing, The Sceptical Investor.

If you want to invest in shares based on fundamentals rather than chart analysis, then at some point you’re going to have to learn how to value companies.

This isn’t easy. You’ll have to learn to read a set of accounts at the very least. And even then, picking winners rather than losers is by no means certain. This is why lots of investors prefer to hand over the work to a fund manager, or simply buy an index fund.

But if you’re tempted to have a go at picking stocks for yourself, here’s a very rough guide as to the things you’re going to have to consider.

What to think about when analysing companies

Before you invest in a company, you have to know whether the price you’re being asked to pay is a good deal or a bad deal. That means you need to have an opinion on what the business is actually worth.

And ultimately, to have any idea of what a business is worth, you need to answer three questions.

1) How does the business make money?

This often seems like a simple question to answer. But even in businesses that are apparently relatively straightforward, it isn’t always.

Take the magazine and newspaper publishing business. If you see publishing as primarily a business that makes money by sourcing eyeballs and delivering them to advertisers, then the product is the audience, and the customer is the advertiser.

If you see publishing as primarily a business that makes money by sourcing information and delivering it to readers, then the product is the information, and the customer is the reader.

Either model can be made to work, and most publishers are a mixture of both. But the challenges involved in each are very different and the key metrics required to measure success are going to be different too.

This is where your “circle of competence” – a concept popularised by Warren Bufftt and Charlie Munger – comes into play. Your circle of competence – in this context – represents types of businesses that you are familiar with and understand better than most people.

As Buffett put it in his 1996 letter to shareholders: “What an investor needs is the ability to correctly evaluate selected businesses. Note that word ‘selected’: You don’t have to be an expert on every company, or even many. You only have to be able to evaluate companies within your circle of competence.”

The key, as Buffett puts it, is to understand the difference between what you know, and what you merely think you know. “The size of that circle is not very important; knowing its boundaries, however, is vital.” Investors typically come unstuck when they think they know something that then turns out to be false.

This is where beginner investors often get confused. They may have heard Peter Lynch (the extraordinarily successful Fidelity fund manager, and author of One Up on Wall Street) talk about buying “what you know”.

Lynch is not talking about investing in M&S because you like prawn sandwiches and reasonably durable underwear. But if you happen to work for an underwear manufacturer or a sandwich shop that supplies M&S, or you work in logistics and have a deeper understanding of supply chain issues, then that might give you an edge in figuring out what the intrinsic value of M&S should be, for example.

Nor does it mean that you should invest directly in your employer because you understand them better than any other company. For a start, that’s way too much concentration risk (you don’t want to have both your savings and your income being dependent on the health of a single company).

Secondly, there’s a real danger of falling outside the boundaries of your circle of competence – you probably think you know more than you really do about the company that employs you.

Also, you need to have some sector diversification, because you don’t want to have all of your eggs in one industry basket. So, ideally, you want your circle of competence to cover a number of areas – which is not as hard as it might look, given the range of interests and career experience each of us builds over time.

B) Is the business any good at what it does?

If a company is good at what it does, then it should be able to generate consistent growth while remaining profitable.

While there are many measures you can look at – each sector will have its own key metrics, which is where your circle of competence comes in – one useful measure is to look at “return on capital employed” (ROCE).

ROCE looks at a company’s trading profit as a percentage of the money invested in the business. In other words, it shows how good a company is at turning money that’s been invested in it into profits.

ROCE can help to separate quality companies with sustainable growth from those that are dependent on factors such as acquisitions or financial engineering to flatter earnings and sales figures.

As my former colleague and experienced analyst Phil Oakley often points out, ROCE is almost like an interest rate on a savings account – it shows you how hard your money is working, and it also compounds over time, which is crucial to generating market-beating returns in the long run.

You should compare ROCE against the sector average, and the wider market as a whole. But more importantly, you should compare it across time. Look at the company’s history – you want to see a consistent or growing ROCE over time, so that the compounding effect gets to work for you.

C) Can the business keep it up?

The problem with being a profitable business is that everyone ends up wanting a piece of the action. This is at the heart of how free market capitalism works (in theory). Entrepreneurs spot an opportunity to make money; one of them cracks it, and makes a lot of money. Other entrepreneurs notice that someone else has discovered a honey pot, and they all swarm over. Eventually, only the most efficient operators survive. As a result, they make just enough profit, while consumers and the wider economy benefit from scarce resources being used efficiently.

This is – perhaps counter-intuitively, as the ongoing appeal of centralised systems demonstrates – a good way to manage and distribute resources. But it’s a pretty brutal environment in which to make a living. So if you’re a shareholder, you want the company to be able to maintain its lead on the competition for as long as possible.

As Buffett put it in 2011: “The single most important decision in evaluating a business is pricing power. If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business. And if you have to have a prayer session before raising the price 10%, then you’ve got a terrible business.”

The advantages that make pricing power possible are collectively known as an “economic moat”. Given that profit margins are generally competed away over time, a consistently high ROCE and stable margins are good quantitative signals that a company has a decent moat.

In terms of qualitative judgements, you need to understand what that moat consists of, and whether or not it is sustainable. For example, a company may have a powerful brand (such as Coca-Cola or Apple). Or it might own a lot of patents. Or it might be protected from competition by a wall of regulation (tobacco companies being the most obvious example).

Equally, a company’s dominance might be threatened with political intervention if it becomes too obviously powerful within its niche – social media giant Facebook is one example. Put simply, what is the company’s competitive advantage, and will it last?

• For more on this topic, and many others to do with contrarian investing, you can grab a copy of John’s book here.

Welcome back.

In this week’s issue of MoneyWeek, Jonathan Compton looks at how farming currently works (hint: its business model is unsustainable) and how it might look in the future as the global population gets richer and diets change; farmers respond to an increasing number of environmental challenges; and the “eye-watering” level of subsidies inevitably fall. He picks the best ways to invest in the farms of the future. It’s well worth a read – so if you’re not already a subscriber, get your first six issues free here now.

In the latest podcast, John talks to Helen Thomas of BlondeMoney, one of the most astute political analysts I know, about V-shaped disappointments and the “velocity of people”, and why Donald Trump could spring a surprise come November’s presidential elections. Don’t miss this one – you can listen here (or wherever you get your podcasts).

We also have a new “Too Embarrassed To Ask” video. This week, we discuss what “liquidity” is, and why it matters. Check it out here.

Here are the links for this week’s editions of Money Morning and other web stories you may have missed.

• Monday: Two “crosses” to help you decide when to buy and sell the markets
• Tuesday: Warren Buffett, hater of pet rocks, buys his first gold mine
• Wednesday: Why Warren Buffett’s purchase of Barrick shares is such a big deal for gold-mining stocks
• Thursday: Investors are assuming a near-perfect future – that seems unwise
• Friday: Career risk – the private investor’s secret weapon

Now a swift rundown of this week’s main charts.

The charts that matter

Gold slipped back after Warren Buffett’s purchase of half a billion dollars’ worth of shares in mining giant Barrick. It’s now over $100 below the fresh peak it hit at the start of the month – but the show’s by no means over yet.

(Gold: three months)

US dollar index (DXY – a measure of the strength of the dollar against a basket of the currencies of its major trading partners):

(DXY: three months)

Ten-year US government bond yield:

(Ten-year US Treasury yield: three months)

Ten-year Japanese government bond yield:

(Ten-year Japanese government bond yield: three months)

Ten-year German bund yield:

(Ten-year Bund yield: three months)

Copper:

(Copper: nine months)

Aussie dollar:

(Aussie dollar vs US dollar exchange rate: three months)

Bitcoin:

(Bitcoin: three months)

Oil price (Brent crude):

(Brent crude oil: three months)

Amazon:

(Amazon: three months)

Tesla:

(Tesla: three months)

Have a great weekend.

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.

If there’s one thing that everyone knows about Warren Buffett, it’s that he's not a fan of gold.

The man commonly described as the world’s greatest investor (unless you’re a member of the “Robinhood” generation, who are yet to be taught the value of fundamentals by Mr Market in his inimitably brutal manner – don’t worry kids, it’s coming), has frequently pointed out that gold, an inert metal, is no match for solid, honest, productive companies made in the good ole US of A.

Gold, he once said, “gets dug out of the ground in Africa, or some place. 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.”

So it’s intriguing to see that the world’s most famous hater of the yellow metal has just bought a gold mine.

Gold might be useless, but right now Buffett prefers it to banks

Around about this time, 49 years ago, Richard Nixon took America off the gold standard. (It was on 15 August, to be exact).

There’s a lot to the story, but to keep it simple, Nixon needed money to pay for the ongoing disaster in Vietnam, and the gold standard was crimping his ability to print money to fund it. So he simply stopped foreign governments from swapping their dollars for gold. And that was that.

Gold was no longer part of the monetary system. The gold standard, which economist John Maynard Keynes once described as a “barbarous relic”, was at an end (I mean, bits and pieces hung around for a bit, but let's keep this simple).

Gold has maintained an informal role as a monetary metal (why do you think central banks still own so much of the stuff?) but it has no formal role in the financial system. And that leads many to ask: what’s the point of it?

People who invest in it are frequently seen as a little flakey and conspiratorial. The main complaint about gold – mentioned regularly by Warren Buffett – is that it doesn’t do anything. There’s not a lot of it about, but that’s OK because it doesn’t have many industrial uses and there’s only so much jewellery demand.

It doesn’t pay any yield. In fact it costs you to own it. So why own gold when you could own Coca-Cola, say? Or another superbly successful company that can compound over time? Why bet on a “pet rock” when you can bet on American ingenuity?

That’s the Buffett line, and it’s regularly parroted by finance journos and investors who simply can’t wrap their heads around the idea of a world where preserving, rather than growing your wealth, might become a necessity.

Anyway, so this relentless stream of contempt is why some might find it slightly amusing that, during the second quarter, according to just-released papers, Buffett’s investment vehicle, Berkshire Hathaway, took a big stake (1.2%) in the world’s second-biggest gold miner, Barrick Gold.

It’s even funnier that he flogged off Goldman Sachs and JP Morgan in the process of doing so. Do feel free to have a wee chuckle to yourselves.

Be like Buffett: keep your ideology for speeches, not for your portfolio

The thing is, you can take the mickey out of Buffett and I can see why gold bugs might enjoy doing so. But what you can say for Buffett is that he’s not ideological. And you should aspire to be the same.

At the end of the day, Buffett has the mental flexibility to take advantage of opportunities when he spots them. For example, he’s been extremely damning about airlines in the past. But it hasn’t prevented him from owning them.

And Buffett was once a massive investor in silver. Back in 1997, he bought 111.2 million ounces of the stuff, then topped it up in early 1998 until he held about 129 million ounces. That’s a lot of silver, but all the same, it accounted for less than 2% of Berkshire's portfolio.

In his 1997 investor letter, he described it as a “non-traditional commitment” and noted that “marked to market, that position produced a pre-tax gain of $97.4m for us”.

His rationale for buying back then was based purely on silver's industrial uses. In short, he reckoned that there was too much demand and not enough supply – “inflation expectations, it should be noted, play no part in our calculation of silver’s value." He ended up selling in 2006 for a solid profit (though a lot less than he’d have got if he’d stuck with it for another five years).

His bets are not always successful – no one’s are. But even when he’s willing to say publicly “I’d never invest in that”, he’s more than happy to pull a U-turn if the conditions arise that make it look attractive.

So that’s something to cultivate.

So why has Buffett done this anyway?

Anyway, Buffett isn’t bailing out of banks entirely – he built up his stake in Bank of America. So this looks like he’s cashing out of the expensive banks in favour of cheaper ones.

And why buy a gold miner – which was his only entirely new holding? Well, whatever he thinks of gold, it’s selling for a lot of money right now. And unlike the last time gold was at this level, gold miners have had some respect for shareholder capital thrashed into them by the brutality of the recent bear market.

It doesn’t take a genius to hypothesise that a high gold price combined with a chastened gold production sector should equate to decent margins for miners. That’s before you consider the lower cost of energy on top of that.

If you haven’t already bought into the sector, then I think there’s still time to follow Buffett’s lead. My colleague Dominic wrote all about his favourite precious metals miners in the current issue of MoneyWeek, out right now. Subscribe now to get your first six issues free.

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).

Contrarian investing profiting from out-of-favour assets isn't easy. In an extract from his book, The Sceptical Investor, John Stepek looks at how to find fund managers who can do it.

Finding a fund manager who can outperform the market on a consistent basis over the long run is not easy. Indeed, one of the main arguments for passively tracking the market over active investing is that it's so hard to find good active managers. That said, there are ways to boost your odds. Here are some key traits to look for if you're trying to find a contrarian manager.

A transparent, clearly communicated strategy

Look for managers with defined strategies that they can easily articulate. Successful investment is tricky, but the principles are not hard, so it should be more than possible for a knowledgeable fund manager with any degree of enthusiasm and conviction to explain their process to a reasonably intelligent adult.

Understanding how a fund is "meant" to work is critical. David Swensen who, as manager of the Yale University endowment, has access to the most elaborate investment strategies on earth has said in the past that he is not a fan of "quantitative" strategies, which rely on algorithms to find patterns in markets. "The fundamental reason is that I can't understand what's in the black box. And if I don't know what's in the black box and there's underperformance, I don't know if the black box is broken or if it's out of favour. And if it's broken, you want to stop. And if it's out of favour, you want to increase your exposure." Swensen's point is that you need to be in a position to judge whether a manager's strategy makes sense; whether it fits with your own portfolio; and whether the manager is actually sticking to it. "Style drift" is probably one of the biggest risks to watch out for with active funds, because if you think you own one thing, and in fact you own another, it can derail your whole strategy (look at Neil Woodford, for example).

You probably won't be able to talk directly to a fund manager before you invest with them. But the best ones make communication a priority. Nick Train of Finsbury Growth & Income, for example, has an extremely clear strategy: buy companies with durable consumer brands, run a concentrated portfolio, don't trade too often and ignore macroeconomics entirely. And, of course, there's Warren Buffett. Buffett runs an exceptionally complicated group of companies, sets up deals that only he could get done and uses a lot of financial engineering. Yet he makes a virtue and a selling point of clear and regular communication with investors. In each case, you know what you're getting, which is the minimum starting point for deciding whether or not you should invest.

Look for high conviction

While active fund managers have a poor record of beating the market as a group, several studies have shown that this isn't down to a lack of stock-picking ability. A study from about ten years ago by Randy Cohen, Christopher Polk and Bernhard Silli looked at fund managers' "best ideas". They found that the stocks that managers invested most heavily in did better than both the market and the rest of their portfolios. The researchers concluded that managers were over-diversifying the low-conviction ballast in their funds was holding them back. So you want to see conviction. By that I mean you want to invest with a manager who will spend time finding great ideas, then backing them to the hilt. The portfolio should be relatively small (as few as 20 stocks is enough to diversify away the majority of individual equity risk, although there's an argument for holding more as the companies in question get smaller).

Find asset nurturers, not gatherers

When you have a small amount of capital, you can invest in the tiny, neglected corners of the market that few others are paying attention to. If you have billions, then you need to invest in stocks that have the capacity to absorb big purchases without moving the share price. Those sorts of companies tend to be well researched, offering less opportunity for finding hidden gems. So it's easier to beat the market with a small amount of money than with a lot of it.

But this highlights the conflict between the art of investing and the business of being an investment manager. Behavioural investing expert Michael Mauboussin sums it up in his 2006 paper, "Long-Term Investing in a Short-Term World". "The investment profession is dedicated to delivering superior results for fund shareholders; practitioners tend to be long-term oriented, contrarian and patient. The investment business is about gathering assets and generating fees for the investment company as opposed to the fund holders." In other words, for fund managers it's ultimately more profitable to focus on getting bigger, than it is to focus on achieving excellent returns.

So you not only want to find a relatively small fund, but you also want to find one with explicit, well-explained limits on how large the fund will grow. That in turn suggests you should favour small, investor-focused, independent investment firms, rather than the big, profit-focused, fund-management brands.

Does the manager have "skin in the game"?

If you are going to put faith in a fund manager's ability to grow your hard-earned savings, then at the very least you should expect them to be putting a significant chunk of their own wealth at risk too. You don't want to be with a manager who merely sees themselves as a custodian of someone else's money, because at the end of the day, there's only so much that anyone can care about what happens to other people's money. In effect, you want someone who is managing their own money, with you tagging along for the ride.

This makes intuitive sense, but it's also backed up by evidence. In a recent paper "Skin or Skim? Inside Investment and Hedge Fund Performance" Arpit Gupta and Kunal Sachdeva looked at a database of US hedge funds, many of which were set up to manage "insider money" rather than money from external investors. They found that "funds with greater investment by insiders outperform funds with less skin in the game'" and they also outperform more consistently. This is in large part because the investors, as well as pursuing high-conviction strategies, make sure the fund doesn't grow too large.

Low costs and fair fees

Costs matter. Funds researcher Morningstar has demonstrated over and over again that one of the best predictors of future performance for active funds is cost cheaper funds do better and survive for longer than their more expensive counterparts. And you don't just want low fees you want a fee structure that will encourage the manager to do their best for you. Again, this is the sort of area where small managers usually have the edge. The managers are typically owner-founders of the business, so they care about keeping costs low in general; they are frequently motivated by a sense that the investment industry charges too much; and perhaps more importantly, a fairer cost structure gives them a competitive edge.

In an ideal world, a fund manager would take a reasonable salary and have a large proportion of their net worth invested in the fund alongside their clients. When clients do well, they do well and that's as far as their incentive goes. That may be too much to ask for from most managers. But scrutinise costs and pay particular attention to performance fees what benchmark does the fund have to beat? And is there a high-water mark (ie, the fee isn't charged until the fund hits a new high)? Remember the bigger the chunk of your savings you have to pay to a manager, the harder it is to outperform.

Be patient and diversify

As Howard Marks of Oaktree Capital points out, if a manager wants to "have a chance at the big money" then he or she must "assemble a portfolio that's different from those held by most other investors". If you behave conventionally, you'll get conventional results. The risk, however, is that "unconventional" behaviour cuts both ways. An unconventional approach to investing can see you trounce the market or badly underperform it. And even good contrarian managers will endure periods of the latter.

In a 2018 paper, Ben Inker of US fund manager GMO noted that in theory your success rate at picking fund managers could potentially be as low as 20% and you could still manage at least to match the market return over time. The difficulty is making choices and sticking with them. A 2011 study by Aaron Reynolds, cited by Inker, looked at 370 managers who had beaten their benchmarks over a ten-year period a rare and impressive feat. Yet during the ten-year period, nearly every manager lagged their benchmark by at least 5% in at least one year and one in four had underperformed by 15% or more. More pertinently because it would test the patience of any holder half had missed the benchmark by at least 3% a year for three years running and a quarter had made a relative loss of more than 5% a year. Remember, every one of these funds still outperformed over the ten-year period but during that time there were moments when most investors would be driven to sell.

So you have to be patient. This is why having a good grasp of a manager's strategy really matters as long as you feel comfortable that the problem boils down to a manager's style being out of fashion, rather than a genuine lack of ability, then you can afford to wait. And because you can't be sure that you'll pick the right managers at the right time, you want to diversify have a spread of funds and a range of strategies. That diversification will help you to ride out moments of volatility when one or other fund is having a bad time.

The Sceptical Investor (2019) is now available for a limited period of time at a 40% discount for MoneyWeek readers. Go to harriman-house.com/thescepticalinvestor and enter the code SCEPTICAL40 at the checkout.

Gold has a bad reputation among some investors. The shiny metal has long been seen as "the investment choice of the cranky and the fearful", says Andrew Bary in Barron's. It yields nothing, and in the words of Warren Buffett, it just "looks at you". It has certainly fallen out of favour this year. The price has fallen by 11.2% since 22 January to just under $1,200 an ounce that's more than 35% below its peak of $1,900 in 2011.

As a result, however, gold looks "inexpensive". This may prove a good time to top up your holdings in this out-of-favour asset class. Investors should hold 5%-10% of their portfolio in gold.

Hedge against higher prices

For one thing, inflation is beginning to pick up around the world. The yellow metal has served as hedge against inflation eroding the value of stocks and bonds. "Gold was $20.67 an ounce 100 years ago and that bought a good men's suit," as Bary points out. "At $1,200 an ounce, the same is true today."

It has also done well in times of crisis used as a safe haven for centuries, it's an asset that tends to thrive on bad news. Gold rallied by 17% in the six months after Lehman Brothers collapsed a time period when the S&P 500 fell by more than 40%.

Gold is rare all the gold mined in the world would fit into two Olympic-sized swimming pools and that makes it valuable. Annual new mined supply adds less than 2% to the global total, so it's not easy to boost supplies of gold quickly. With paper money, on the other hand, the printing presses can produce more in minutes. That's why "people have historically viewed [gold] as a hedge against government depreciation of local currency", Keith Trauner of the GoodHaven fund management group told Barron's.

Cryptocurrencies have been touted as an alternative to gold, as it is also expensive to mine more of them. But bitcoin, which dropped 55% this year, remains highly volatile, and it's still very difficult to trade. According to some, meanwhile, gold's role in protecting against inflation may have been overstated. "If you strip out the 1970s, you find the relationship between gold and inflation is quite weak," Brian Lucey, professor of international finance at Trinity College Dublin, told Reuters.

"That is because you have a very different inflation regime in the late 1980s and 1990s than you had in the 1970s." Back then, double-digit inflation was the norm. "We're not going back to that."

But prices are set to rise as labour markets tighten, and central banks are poor at containing inflation. There are also still plenty of investors scarred by the 1970s, which bodes well for demand. This week's big gold merger (see page 9) should also spur interest. Time to stock up.

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."

Francisco Garca Params studied economics at the Complutense University of Madrid and completed an MBA at the University of Navarra before joining fund manager Bestinver in 1989. There, he became Spain's most-successful fund manager, delivering annual returns of 16% over 25 years. His record became so important to the firm that its assets under management dropped by 30% when he left in 2014. After a two-year non-compete period expired, he launched his own firm, Cobas Asset Management, in 2017.

What is his strategy?

Params follows the value-investing principles of stock-trading legends such as Benjamin Graham and Warren Buffett. As with Buffett, Params' style has evolved to favour higher-quality firms. "When you're young you want to achieve a quick, high return and you think you can get it with cheap companies, so you avoid quality companies that are more expensive," he told CityWire. "Over time you realise these cheap companies are cheap because they are regular businesses and things can go wrong."

What was his best trade?

At Bestinver, Params' funds often held a stock for a long period of time, but regularly added to or trimmed the size of each investment depending on which holdings seemed cheapest. This makes it difficult to identify how much specific stocks have contributed to his performance. However, when launching Cobas in 2017 he noted that he had seen (and presumably acted on) an "extraordinary opportunity" in miner Anglo American in late 2015, when the shares were trading at roughly 270p. By March 2017, they had recovered to 1,400p.

What can investors learn?

In his book Investing for the Long Term (to be published in English this year), Params sets out a number of pithy principles, including "the more a company appears in the press, the further you should keep away from it" and "the older a company is, the more possibilities it has of surviving". He strongly favours family-controlled firms such as BMW, which has been one of his longest-held investments.

Cheah Cheng Hye dubbed "Goldfinger" and the "Asian Warren Buffett" is the co-founder and chairman of Hong Kong-based Value Partners Group. Born in Malaysia in 1954, he wrote for the Asian Wall Street Journal before becoming head of research and a proprietary trader at Morgan Grenfell in 1989. In 1993, he co-founded Value Partners with $5m in assets under management. The company listed on the Hong Kong stock exchange in 2007.

What is his strategy?

Cheah is an old-fashioned value investor. He uses the "Graham-Dodd" approach to buying stocks, implementing religiously the principles in Benjamin Graham and David Dodd's book Security Analysis referred to as the "bible of value investing". However, he stresses the importance of focusing on cash flow and corporate governance to a greater extent than Graham and Dodd, saying these considerations are crucial in emerging markets. He believes in thorough on-the-ground research: Value Partners makes over 2,500 company visits every year. The firm has grown to $14bn in assets under management and returns have averaged 15% per year. Cheah's total personal compensation in 2016 was $35m, says Forbes.

What were his top trades?

Much of Cheah's success has come from avoiding potential disappointment. When the world was chasing dotcom stocks, for example, Cheah bought none. However, he once invested $30m in Oasis Hong Kong Airlines, only to see the firm go bust withinsix months.

When Chinese carmaker BYD Auto's stock went into free fall, Cheah visited the firm and decided the stock had been unfairly marked down. Value Partners became the second-biggest shareholder in the company. In 2008, Warren Buffett took an interest. Overnight, the world bought in and Value Partners sold out, taking a HK$600m (£55m) profit.

What can investors learn?

Cheah advocates the "stupid- clever" approach. Ego is the investor's biggest enemy: if you think you are stupid, you can do smart things. If you think you are clever, you will do stupid things. You must remove your sense of self from the investment equation.

Philip Carret was born in 1896 in Massachusetts. After World War I he worked as a financial reporter before setting up the Pioneer Fund, oneof the first investment funds, in 1928, which he managed until stepping downin 1983. In 1963 he set up Carret & Company, which focused on private accounts, and was still managing portfolios until shortly before his death in 1998.

What was his strategy?

Carret was a value investor, buying stocks in obscure companies that he felt were undervalued, aiming to at least double his investment. As well as a cheap price, he liked the companies he invested in to have good balance sheets, growing earnings and managers who invested in the company. He was also a firm believer in "buy and hold".

Did this work?

Over 55 years the Pioneer Fund returned about 13% a year, which meant that a $10,000 investment would have been worth $8m by the time Carret stepped down in 1983. In contrast, the US stockmarket produced an annual return of 8.3% between 1928 and 1983, which means that a similar amount invested in it would be worth $723,000. Carret's record as a private wealth manager isn't available, but he was managing about £225m in assets during the early 1990s. Warren Buffett called him one of his heroes.

What were his biggest successes?

Carret made a lot of money buying into a Cuban sugar company in 1939, on the belief that World War II would drive prices higher. At various points during the 1940s, he sold the stock for 37 to 144 times the asking price.

What lessons are there for investors?

Carret had 12 pieces of advice for investors. 1. Never holdfewer than ten shares covering five different fields of business.2. Reappraise every share you hold every six months. 3. Keep at least half of your fund in income-producing securities. 4. Consider yield the least important factor in buying stocks. 5. Take losses quickly, but let profits run. 6. Don't put more than 25% of your fund in securities where information is not regularly available. 7. Avoid inside information. 8. Seek facts, not advice. 9. Ignore mechanical valuation formulas. 10. When stocks are high, place at least half of your assets in short-term bonds. 11. Don't borrow too much money. 12. Set aside some of your funds to buy long-term options on promising companies.

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.

The financial technology (fintech) revolution is partly about as the name suggests better technology, which leads to lower costs and better accessibility. But it's also about the power of the crowd and one of the best examples of "crowd power" is in social investing and trading. Companies such as Israel-based eToro and US firm Covestor allow you to monitor what other users are doing, then copy their decisions. Their message is simple why trust the overpaid fund management "experts" instead of ordinary folk with extraordinary gifts?

It's a beguiling idea but as you can imagine, there are a few challenges. First, many of these putative "Warren Buffetts next door" tend to be of a particular type: day traders. There's nothing wrong with that per se, but it's far too risky for most of us, as a dip into the trading records reveals. Take one small example from eToro. One of its star investors is someone with the handle Yarostarak. He's recorded gains of 172% in the last 12 months, and 56% in May alone. Yikes. But look at his portfolio and you'll see cryptocurrency ethereum at the top of the list (worth 38% of his portfolio), followed by bitcoin at 18%.

To be fair, he trades in equities too: there's some Amazon and Twitter in there. But one of his recent blogs identifies a trade in a stock with ten times leverage (ie, lots of borrowed money). No wonder his weekly maximum drawdown (ie, the amount he loses in a given week) can be as much as 7%. That makes for a scary ride for most of us. Still, it's clear he's a smart cookie if rather active and he has more than 10,000 people following his trades on eToro.

But this brings us to the second problem. What happens if and when Yarostarak loses his magic touch? Do I have to find another brilliant trader? And can I really be bothered to track all these people? This is where eToro's newly launched Top Trader CopyFunds service comes in and it has the makings of a genuine innovation. The service draws up a top list of traders, categorised by style, and makes them available in a single product you can buy, a bit like a fund.

So Yarostarak appears at the top of the Active Traders CopyFund, with a 2.38% allocation, followed by a long list of other traders. But be under no illusions. You may get diversification between individual strategies, but you won't get a normal investment portfolio. This particular fund is still running at 50% in currencies, against 32% for stocks. For most of us, it's still too racy.

However, two other versions of this service might suit the mainstream better. The first is the Market CopyFunds service, in which eToro identifies key indices and stocks that move up and down based on thematic or sector-based trends. Take the PanicMode portfolio, which "comprises short positions on major market indices and long positions on gold and silver". My only concern here is that thematic investing doesn't always deliver in terms of returns.

The other is Partner CopyFunds, which allows asset managers to offer products based on their own strategy. The Warren Buffett CopyFund (which, needless to say, is not run by Buffett) tracks Buffet's picks using public SEC filings. Both the Market and Partner CopyFunds trade in equities and similar products, rather than the derivatives used in the trader system.

Overall, eToro is working hard to herd the crowd into a more user-friendly shape. The big question is whether the investing ideas behind these funds deliver on the goods in terms of consistent long-term performance. One to watch, but make sure you know exactly what you're buying before you consider investing.

News in brief

Funding Circle has become the latest peer-to-peer (P2P) lender to receive direct authorisation from the Financial Conduct Authority. The move means that Funding Circle will be able to launch its Innovative Finance Isa (IF Isa).

Approval for the small business lender follows that of consumer lender Zopa on 11 May, and leaves only RateSetter as the last of the big three P2P platforms yet to receive authorisation. Together, RateSetter, Zopa and Funding Circle account for more than 60% of the UK's P2P market. Funding Circle was launched in 2010, and has so far lent out over £2.3bn, recently overtaking Zopa to become the UK's biggest P2P platform by cumulative lending, says Emma Dunkley in the Financial Times.

Zopa, meanwhile, plans to launch its IFIsa this month. The firm will offer two products, Zopa Plus, and Zopa Core, which will target returns of 6.1% and 3.9% respectively. The IF Isa will be available to existing investors from 15 June, but no date has yet been set for new investors. In addition to launching its IF Isa, it is retiring its lower-risk "Access" and "Classic" products, and closing down its Safeguard fund. The Safeguard fund was introduced in 2013 and was designed to cover losses incurred from investing in Access and Classic loans "during a normal economic environment".

Fintech firm TransferWise, which offers low-cost overseas money transfers, is to offer cross-border bank accounts to customers, says Martin Arnold in the Financial Times. The account will be available to small businesses, sole traders and freelancers in the UK, EU and US later this month, and will be extended to individuals later this year. The account, which has no set-up charges or monthly fee, will allow customers to hold money in 15 different currencies.

Customers will pay a "small transparent charge" of 0.5%-1% when making cross-currency payments. TransferWise was founded in 2011 and is now valued at $1.1bn. The firm has been profitable since the start of 2017, is growing revenues at 150% a year and, says Arnold, is "regularly cited as a candidate for an initial public offering".