Investors should mimic Warren Buffett’s approach – or buy this value-focused investment trust

The current managers have a sound strategy and an excellent recent track record of outperformance

Warren Buffett is greatly admired by the vast majority of investors. Under his leadership, Berkshire Hathaway has generated a near-20pc annualised return over the past 58 years. This is double the return of the S&P 500 index over the same period and has led the “Oracle of Omaha” to become one of the wealthiest people in the world.

The Berkshire Hathaway annual meeting, which took place earlier this month and is often referred to as “the Woodstock of capitalism”, attracts widespread investor and media interest. A great deal of column inches are dedicated to praising Buffett’s skill in building a great fortune, while investors laud his ability to pick winning stocks and avoid potential losers on a consistent basis.

It is therefore extremely surprising, in Questor’s view, that seemingly few investors ultimately seek to follow Buffett’s value investing strategy when managing their own money.

For instance, rather than aiming to purchase stocks for less than their intrinsic value and focusing on companies that enjoy wide economic moats, many investors instead return to their same old habits, such as following the investment herd or buying “story stocks”, that ultimately prove to be far less successful than the principles espoused by Buffett.

Clearly, any investor who adopts a value investing approach is not guaranteed to obtain Buffett-esque results. However, it is a logical and proven strategy that can have a positive impact on portfolio returns. Therefore, rather than just admiring Buffett, seeking to mimic his investment approach seems to be a more rewarding pursuit for long-term investors.

One investment trust that unashamedly follows a value investing approach is Temple Bar. Its strategy centres on using short-term market fluctuations, often prompted by investor overreaction to news flow, to buy temporarily undervalued stocks. Over time, their share prices can return to, or even exceed, their underlying value to deliver generous capital gains.

In addition, the trust seeks to avoid “value traps”. This is where low-quality companies that offer scant investment appeal trade at depressed prices. By focusing on the financial standing of businesses, the degree of competitive advantage they enjoy and adopting a patient approach that is not influenced by investor sentiment, it has posted impressive returns over recent years.

Since the current managers took over the running of the trust in October 2020, it has generated a 63pc capital gain. This compares favourably with a rise of 34pc for the FTSE All-share index, which is its benchmark. Despite this, the company continues to trade at a 6pc discount to

‘The company continues to trade at a 6pc discount to net asset value. This suggests that it offers good value for money’

net asset value. This suggests that it offers good value for money.

Indeed, many of its major holdings are viewed by this column as highquality companies that trade at attractive prices. BP, Shell, Marks & Spencer and ITV are among its holdings in what is a relatively concentrated portfolio, where the 10 largest positions account for about 58pc of net assets.

This means the trust’s performance could prove to be volatile. It may also differ materially from that of its benchmark, which this column believes is a positive for any investor that seeks index outperformance from their actively managed holdings.

With a gearing ratio of roughly 8pc, the trust is well placed to benefit from the stock market’s long-term growth prospects. An improving British and global economic outlook, particularly as a period of rapid interest rate rises comes to an end, suggests that share prices are likely to rise en masse as weak trading conditions slowly abate.

Indeed, Questor continues to view the FTSE All-share index as being relatively undervalued and unloved. Several of its members trade at attractive prices, with investor apathy towards Uk-listed companies unlikely to persist in perpetuity.

The trust’s dividend yield currently stands in excess of 4.1pc, which is slightly above the FTSE 100’s income return of 3.9pc. Dividends per share rose by more than 18pc last year, which highlights its income appeal during an era of rampant inflation.

Since this column first recommended that readers purchase Temple Bar in November 2019, its shares have fallen by about 14pc. While this is a disappointing result, Questor believes that its current managers have a sound strategy through which to deliver index-beating performance over the long run.

Questor says: buy

Ticker: TMPL

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