The Daily Telegraph - Saturday - Money
Invest like the best and bag big returns
Imitating the style of the world’s leading investors such as Warren Buffett can really pay off. By Lauren Almeida
Taking on the stock market without a strategy is a dangerous game. Random stock picks can pile up into a messy, unbalanced portfolio that is more likely to lose you money instead of growing it.
You do not need to start from scratch. Imitating the style – or even the exact portfolios – of the world’s best investors can help your cash grow. Here, we break down how you can invest like the best and bag Buffett-style returns.
Warren Buffett, the so- called “Sage of Omaha”, has delivered returns of almost 200pc in the past 10 years alone for investors in his Berkshire Hathaway.
His success is based on a no-nonsense approach: invest in good businesses, with trustworthy managers, at fair prices, and you should succeed in the long term. To incorporate Mr Buffett’s investment style into your Isa, you could either buy shares in Berkshire Hathaway itself, or buy shares in the companies it invests in. Big, quality businesses such as Apple, Disney and Diageo feature in Mr Buffett’s portfolio. He has also bets big on oil – his company is the biggest shareholder in both Chevron and Occidental Petroleum.
Laith Khalaf, of the broker AJ Bell, suggests Fundsmith Equity as an alternative for investors who prefer to buy funds based in Britain. The £25bn fund is run by Terry Smith, one of the nation’s most widely followed investors.
“The Fundsmith Equity approach is similar to Buffett’s, boasting an owner’s manual and an annual shareholder letter, like Berkshire Hathaway, and following the strategy of buying good companies, not overpaying, then doing nothing,” he said. The £692m UK Buffettology fund is another popular option. It is managed by Keith Ashworth-Lord, who is licensed to use the Buffettology brand established by Mr Buffett’s former daughter-in-law, Mary Buffett. In the past 10 years, Buffettology has returned 137pc compared with a 73pc return in the FTSE 100.
Benjamin Graham is hailed as the “father of value investing”, where investors seek out shares trading below their intrinsic value. This is determined through “valuation” processes, such as calculating the price-to- earnings ( P/ E) ratio. This compares a company’s share price to its earnings – the lower the multiple, the cheaper the stock.
A P/ E ratio is useful for a quick valuation, but does not paint a comprehensive picture. It ignores aspects such as a company’s debt, its assets and cash flow. Value investing has been out of favour for most of the last decade, but has stepped back into the limelight thanks to the economic environment. Mr Khalaf recommended the Jupiter UK Special Situations fund, run by Ben Whitmore, which invests in companies such as BP and has returned 102pc over the past 10 years.
Growth investing was a very lucrative strategy over the 2010s. This is when stock pickers back companies which are expected to grow their revenues fast, sometimes even when they are still far off from making a profit. The trouble with this strategy is that often these stocks come at very steep valuations and if something goes wrong the share price can tank quickly. Peter Lynch’s idea was to target “growth at a reasonable price”, or GARP.
Mr Khalaf says this blended both the value and growth investment styles. Best known for his book One Up on Wall Street, Mr Lynch has long advocated that regular savers can bag big gains on the stock market by spending time studying a company’s financial statements. But some of his advice borders on the dangerous, for instance holding between three and 10 stocks seems woefully underdiversified, something a fund can easily mitigate.
“Those in search of 10 baggers might consider a smaller companies fund,” says Mr Khalaf. “The Tellworth UK Smaller Companies fund combines growth and value characteristics in a way Lynch might well have approved of. For those who are interested in GARP, the Artemis SmartGARP Global
Equity fund might be worth investigating.
Finally, but arguably most important for DIY investors, Jack Bogle, who revolutionised passive investing. He founded Vanguard, which popularised low- tracker index funds and is still one of the largest investment companies in the world.
Mr Bogle’s philosophy was that regular savers should not have to pay through the nose to get access to the stock markets – and in fact, professional investors rarely beat the market anyway. Vanguard offers index trackers as well as pre-packaged “LifeStrategy” funds, which invest in a mix of global stocks and bonds.
Over the past three years, the Vanguard LifeStrategy 100pc Equity fund has delivered returns of 42pc, compared with an average 37pc return from global fund managers.
‘Fundsmith Equity follows the strategy of buying good companies, not overpaying’