I recently took a trip to my neighborhood book store and perused the business section. As I went through the stacks of books, I was amazed at the sheer volume of text available on “investing like Warren Buffett.”
Buffett seems to do his best to explain his investment methods in plain language. Why do we still need to purchase books to learn what he’s thinking, when he’s so direct?
Let’s dig a little deeper.
What makes Buffett successful?
“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” -Warren Buffett
Truthfully, Warren Buffett is not really a “deep value” investor. Some of Berkshire Hathaway Inc. (NYSE:BRK.A)’s largest holdings, such as Coca-Cola, sport P/E ratios higher than the market average. Berkshire Hathaway Inc. (NYSE:BRK.A)’s best investments were chosen because of growth prospects, great brands, and competitive advantages. Sure the old man pays a good deal, but only if it’s for a high quality business.
In short, Buffett likes moats.
A moat is an ingrained advantage that keeps competitors at bay. It can be as simple as high switching costs for a bank, or a respected brand name.
One example of this moat strategy is Berkshire Hathaway Inc. (NYSE:BRK.A)’s purchase of shares of National-Oilwell Varco, Inc. (NYSE:NOV). This is a relatively new Berkshire Hathaway Inc. (NYSE:BRK.A) addition, and Buffett’s team has added more shares recently.
National-Oilwell Varco, Inc. (NYSE:NOV) does have some great value metrics, such as a P/E ratio of about 13, and a PEG of 1.08, but that alone isn’t reason to invest. This oil and gas equipment business likely appeals to Berkshire Hathaway Inc. (NYSE:BRK.A) because of its overwhelming market share.
National-Oilwell Varco, Inc. (NYSE:NOV) currently holds over 60% of market share in all addressable markets, and that figure is rising. Their second quarter results showed shrinking margins, but surging sales, and this is being done purposefully. The company has instituted an acquisition strategy that is hurting margins in the short-term, in the hopes that they can muscle out competitors in the long-term.
This is clearly a high-moat company, simply due to a lack of viable competitors. In Berkshire’s view, it is a great company at a fair price. Does that mean that “investing like Buffett,” means you should run out and buy National-Oilwell Varco, Inc. (NYSE:NOV)?
Well, that’s where it gets tricky.
Investing like Buffett is hard, but it could be so much easier
The truth is that buying National-Oilwell Varco, Inc. (NYSE:NOV), or any individual stock, carries substantial risk no matter who else owns it. Which brings me back to the books on “Buffett investing.” If these authors really want to help us, why don’t they just tell us to buy shares of Berkshire Hathaway?
Berkshire Hathaway owns shares of National-Oilwell Varco, Inc. (NYSE:NOV), as well as a whole host of “Buffett” stocks. Berkshire’s stock is up nearly 40% in less than a year, second quarter earnings were up 46%, and clearly the shares are the simplest way to “invest like Buffett.”
Another safe way to invest like Buffett may surprise you–it’s actually through an exchange traded fund (ETF).
While most ETF’s don’t offer the upside of individual stock picks, that’s not the case for the Market Vectors Wide Moat ETF. This ETF does much more than offer diversification–it’s a collection of high-moat businesses that are picked in the Buffett way. The fund’s top holdings include Berkshire businesses like National Oilwell Varco, as well as non-Berkshire picks like eBay.
Whether its the market share of National Oilwell Varco or the “network effect” of eBay, the fund is looking for businesses with competitive advantages and a “sticky” ability to retain customers. If we really want to pick stocks like Buffett, and pick companies that attract and keep customers easily, why not do it through this ETF and get some diversification to boot?
Individual stocks may offer tremendous upside, but we can’t ignore risk. I’d recommend keeping your individual stock picks to 20% (or less) of your portfolio, and to keep a small and focused (Buffet-like) group of them. No one can outsmart sellers every time, so don’t even try to.
The facts are that professional money managers, after fees, lose to the market by about 9% on average. So by following this simple approach, at least 80% of your portfolio will typically beat the professionals!
And this fund also offers much more upside than the typical “market matching” index fund. It’s already up 39% this year, yet it still offers safety as it doesn’t hold more than 6% in any one stock. I feel that, due to the funds investment philosophy (actively seeking out high moat businesses), it’s a great and safer way to “invest like Buffett.”
Be like Buffett, think for yourself
The truth is, the books don’t tell us to buy Berkshire directly or an ETF because it’s too simple. It’s not sexy, and there’s no prestige in it.
The approach I’ve outlined can work for you, with one big caveat: you have to want to invest like Buffett, not be him. While this approach may not sell many books, it should make you money.
Having a portfolio that consists of Market Vectors Wide Moat ETF, shares of Berkshire Hathaway, and five (or less) other “high moat” individual stock picks, is one example of a safe and very smart way to invest like Buffett.
The article Want to Invest Like Warren Buffett? It’s Easier Than You Think. originally appeared on Fool.com and is written by Adem Tahiri.
Adem Tahiri owns shares of National Oilwell Varco. The Motley Fool recommends Berkshire Hathaway and National Oilwell Varco. The Motley Fool owns shares of Berkshire Hathaway and National Oilwell Varco. Adem is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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