Investors cannot reasonably hope to replicate the performance of Warren Buffett, the world’s largest investor and the person who resigned as Berkshire Hathaway’s chief executive this week.
It’s an impossible feat for two reasons. Investors have no timing advantages. Buffett, remember, start as a “cigar bat investor” and buy false priced stocks where the company’s valuation is below the actual value of the asset. This was possible in the 1950s and 60s, but not so easy when price and stocks earned n degrees. Modern investors also have no access to the source of Buffett’s ultra-stable loan (his insurance company premium).
However, investors can alternatively replicate his cleverness by using his investment principles and philosophy in portfolio decisions. Buffett himself learned a lot from the teacher Benjamin Graham of Columbia Business School, widely known as the “father of value investment.”
One of Buffett’s most important lessons is to view a company as a company rather than a stock. The value of shares is often guided by emotions, and rises when the market feels bullish, and punishes when, for example, the market is disappointed by insufficient advance guidance.
But if you see yourself as the owner of a part of the business, and Buffett advised investors to view yourself as the owner of the entire business, even if they own a little – your perspective changes. It highlights the long-term nature of your purchase and therefore guides your research. Is this a quality company, what does it do?
Think about how the company worked at different cycles, profitability, return on capital, earnings health and ability to nurture them, and how it worked at debt levels. See how it compares to your competitors. What is the economical moat, such as a well-known brand? Is it managed well?
It’s not enough to identify quality. What’s more important is the price you pay. Buffett always thought of the intrinsic value of the company, and he liked it being obvious. One way to establish the intrinsic value of a company is to use discounted cash flow modeling. How much cash will the company return over the next few years? You also need to look for a safety margin so that the price you pay is below this intrinsic value.
be patient. If you found a great company, but the rating is sky high, wait and buy when the price is fair. Buffett bought his longtime favorite businesses, the “great” American Express and Coca-Cola.
It will be held for a long time. Famous Buffett quotes include “If you’re not willing to own inventory for 10 years, don’t even consider owning it for 10 minutes” and “Our favorite retention period is forever.” By sticking to your investment via thick or thin (“become greedy when others are afraid”), your investment can make your investment worse. This continues naturally from becoming the owner of a part of the business you invested in, but this does not mean that you will never sell. If you bought badly at the company or missed serious problems at the company, like Buffett did at Tesco, then sold it.
Buffett was notorious for his early departure from high-tech stocks as he didn’t understand what they did. However, he realized that he was selling the product everyone wanted, so he bought an Apple. Understanding what your business is doing because you work in the same sector (such as medicines and fintech) will help you better determine if your business is really competitive.
In a nutshell, find great businesses at fair prices and keep them in the long term. It’s more difficult than you think, but following these principles takes a long way.
Purchased: Train (TRN)
Like many countries’ commuters, Trainline has discovered that its progress is hampered by external forces, writes Michael Fahy.
The company is making operational progress with a top-line growth of 12%, primarily a result of strengthening the domestic market, as more people book train tickets digitally. The rise in UK gross profits is attributed to reduced fulfillment costs paid to train operators.
Group-wide operating profit rose 54% to £86 million as topline growth improved operational leverage. Operating cash flow also rose 13% to £154 million. This was primarily used to fund buybacks. It acquired £89 million last year and launched an additional £75 million buyback program last month.
Despite these purchases, Trainline stocks have fallen 38% this year. Investors responded badly to government consultation documents on the UK Railway, the industry’s new regulator in January, planning their own single ticketing platform.
Warnings of this year’s issues, including an ongoing battle to further expand London’s contactless charging zone transport to Home County and overcome changes to Google’s search page in favor of advertisers.
Trainline’s stock trades at 13x fact set consensus revenue. While we understand concerns about government-supported competitors, the UK railway itself never descends from the ground before 2027.
Hold: Smith News (SNWS)
In the decline in the print media market, newspaper and magazine distributor Smiths News avoided performance in the first half as it improved cash generation and profits, Christopher Akers wrote.
Flat revenue performance was supported by a 4% increase in higher margin soccer and Pokemon collectibles as prices rose, contract victory, and volume declined.
Jonathan Bunting’s chief executive said the company has fallen in volumes “somewhere between 8% and 11%” depending on the product.
Given this context, securing 91% of existing publishers’ revenue streams through at least 2029 is key to future sales visibility.
Market conditions also mean that fresh growth initiatives are important. The company pursues recycle collection services, explores new categories such as books and home entertainment, and provides specialized engineering and manufacturing parts to its customers. Management is seeing long-term profit opportunities of £160 million here, but it helps to provide even a small slice of this.
Adjusted operating profit rose 3% to £19.4 million. This is a performance that helped save £3 million. Free cash flow improved from £4.2 million year-on-year to £13.3 million.
The balance sheet has experienced significant delaring in recent years. A better cash generation in half saw average bank net debt fall to £1.1 million at 91% (compared to almost £100 million in 2020), but closing net debt was even more expensive.
Smith’s news trades with just six times the forward consensus revenue. The nearly double digit dividend yield is impressive, and a 15% drop in stock prices from the start of the year could be considered an opportunity. But long-term market uncertainty keeps us on the sidelines.
Hold: Card Factory (Card)
Card Factory provided the right result set for last year, with revenue and profit growth growing along with expectations, Michael Fahy writes.
A similar sales growth of 3.4% was achieved by increasing prices and expanding the range of products.
In fact, due to a double-digit increase in sales of sweets (up 25%), soft toys (20%) and stationery (18%), we have sold more gifts and celebration items than cards last year. One in two that have been sold will come with gifts or celebration products, the company said.
However, Card Factory relies heavily on store sales, which accounts for 93% of total revenue. Online sales are flat at just £8.8 million, and personalized gift business GetsPersonal.co.uk has been discontinued after a quarter of last year’s decline to £4.4 million. More faith has been placed in the partnership sector, with sales increasing by 30%, but it comes from a low base and now contributes only 4% of the group’s sales.
The store business is tackling higher costs, offsetting wage increases last year through improved efficiency and new labour management systems. We also implemented a “space optimization” program that allows more store areas to be allocated to stationery and children’s zones. Still, the additional employment costs £14 million to absorb last year’s budget are expected to rise 4-5% this year. Approximately 1% could be shaved through efficiency measures, but the rest must be met through increased sales and prices, with margins expected to remain flat.
The company removed the target set by reverting its pre-tax profit margin to 14%, 14% by 2027, and instead said it was “against the background of significantly higher inflation than expected.”
If the market had been fully invested in the interim targets of the card factory, the stock could have fallen by 4%, but the consensus forecast was already below this level. While Card Factory stocks currently appear to be in the bargain underground area with six times the revenue, the projected dividend yield appears to be 6.8%, it is difficult to oppose broker Peel Hunt’s claim.
