Why Value Stocks Could Help Protect Your Portfolio
Age can be just a number. But there is a new interest in the wisdom of people who have lived a long time and experienced some economic and other crises.
The indomitable spirit of the Queen has much to teach us in this year of the Platinum Jubilee. There are also lessons to be learned from that other plucky nonagenarian: American investment guru Warren Buffett.
If you want to navigate this stormy period in the stock markets, the views of this 91-year-old man, at the top of his game for more than half a century, are more relevant than ever.
The S&P 500 Index is down 19 percent this year, its drop accentuated by panic selling this week. But shares of Berkshire Hathaway, the $639bn (£516bn) investment vehicle Buffett took over in 1964, are up nearly 0.4 per cent.
This is due to excitement over the way Buffett, also known as the Omaha Saga, is rolling out the fund’s $106bn (£85bn) cash pile amid the market slump.
It is exploiting what it sees as a moment of opportunity, using a tried and tested system that, since 1964, has produced 20.1 percent compound annual growth, compared to 10.5 percent for the S&P.
His key principles include buying when others are scared and choosing quality stocks whose intrinsic value is not reflected in their price. This style of investing is back in fashion as higher interest rates derail technology and other growth stocks.
Berkshire Hathaway has stakes in 90 companies, including banks, insurance companies and railroads. Apple is the largest holding company, at 38 percent, illustrating how Buffett and his team are recalibrating the system for this decade and beyond.
This team is a collection of younger managers, notably Todd Combs and Ted Weschler, the heirs apparent to the Buffett crown. But another nonagenarian plays a leading role: Charlie Munger, 98, the Sage’s best friend.
The fund is said to have started buying apples when Buffett became aware of a friend’s distress over the loss of his iPhone and concluded it was an essential consumer, similar to products from Kraft Heinz and Coca-Cola, two other major holdings. .
A ‘wide moat’ protects these companies from competitors, giving them pricing power and protecting profits.
At least 20 books lay out the tenets of Buffett’s philosophy, including his advice on countering inflation, which ‘ripes just about everyone’. He must excel at his job and support ‘wonderful’ businesses whose goods and services are in demand. In recent weeks, Berkshire Hathaway has gone after such companies, as detailed Tuesday.
The list of purchases includes the insurer Alleghany, for 11,600 million dollars (9,300 million pounds), and shares of Activision Blizzard, the group of video games of Call of Duty, object of an offer of Microsoft. Shares in Citigroup, Paramount Global, personal computer maker HP and oil firms Chevron and Occidental are other purchases in what could be one of Buffett’s latest sprees.
However, even now it doesn’t seem to make a quick buck. As Tracey Zhao, senior fund analyst at Interactive Investor puts it: ‘Buffett’s favorite holding period is forever.’
It’s a credo by which Buffett has made a $113bn (£90.5bn) fortune and won a following of mass investors, many of whom have become millionaires. However, the current cost of admission to the movement is prohibitive: a single share costs £369,000 this week. B shares, with fewer voting rights, cost a modest £245.
If, like Buffett, you see the current conditions in the US market as an opportunity to make money, even though more storms are brewing, you could add some of your recent purchases to your portfolio. If this sounds like too much effort, A-shares make up 4.8 percent of the CFP SDL Buffettology fund, managed by Keith Ashworth-Lord (no relation), who follows the principles of the wise man, including his watch-and-wait strategy. Ashworth-Lord says, “Buffett has been thinking about buying Alleghany for more than 60 years.”
In five years it has returned 27.4 percent, compared to 14.4 percent for the all-business sector. But lately it has been hit by the maneuvers of private equity groups for whom patience is not a virtue.
Ashworth-Lord says: ‘They want to get companies that can provide great future shareholder rewards at a low price. For example, Homeserve, in which we have a stake, is in talks with Canadian infrastructure Brookfield and other private equity groups may be mulling other holdings.’
Buffett is not a fan of private equity, nor of most fund managers.
He recommends that investors who want to diversify should buy a low-cost ‘passive’ index fund. The interactive investor recommends the Vanguard Us Equity fund.
This represents a bet. But Buffett, a firm believer in American enterprise and ingenuity, preaches that “you should never bet against America.” Shareholders who have bet on him would agree.
Since 1990, Berkshire Hathaway’s share price has risen 6,392 percent.
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