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?
