Being Warren Buffett: How to invest in a fully-valued market

There are still stocks worth getting into for the long haul in the Australian sharemarket conclude local Oracle of Omaha devotees fresh from a pilgrimage to Nebraska.

Australian Mark Moreland was one of 38,000 Warren Buffett devotees who flocked to the Berkshire Hathaway annual meeting this year. Standing in a queue at jewellery store Borsheim’s, he met the man himself.

“He’s totally comfortable in his own skin. He’s down to earth, there’s no pretension. He’s like someone you’d meet at the lawn bowls club,” Mr Moreland says of the famed billionaire and value investor who boasts a net worth estimated by Forbes $US66 billion.

Every year, shareholders seek inspiration and insights, or just reassurance, from Buffett's annual meeting and letter (posted on his extreme no-frills website), as well as accompanying special events such as a picnic, cocktail reception, furniture and jewellery sales, newspaper tossing challenge, fun run and steak night. The meeting itself includes an extensive Q&A session with Buffett and his business partner, Charlie Munger.

After a pilgrimage to this 'Woodstock for capitalists' at the stadium-sized CenturyLink Center in Nebraska last month, Moreland and a 17-strong group of shareholders from Australian investing community Teaminvest returned optimistic. There are still stocks worth getting in to for the long haul in the Australian sharemarket despite investors wringing their hands over what appears to be a fully valued market and warnings of an asset crunch, the team concludes.

This optimism mirrors Buffett’s, who this year told shareholders of his long-term bullishness about the US economy, writing in his annual letter that a bet on ever-rising US prosperity was very close to a sure thing.

“The dynamism embedded in our market economy will continue to work its magic. America’s best days lie ahead,” he wrote.

The Oracle of Omaha is known for his long-term strategy and focus on the fundamentals of a business, in contrast to traders looking to buy stocks cheaply and lock in profits as soon as the broader market shows any jitters. And it’s paid off, with his holding company Berkshire Hathaway returning a compounded annual gain of 19.7 per cent between 1965 and 2013. The company’s overall gain from 1964 to 2013 is 693,518 per cent.

One group member clinched a “crazy Warren deal”, securing an Omega watch as part of a one-day only discount offer from Buffett who takes a turn selling jewellery to shareholders at AGM time. It must have seemed ironic to purchase a watch from someone who encourages investors to be less focused on small increments of time.

“It’s a bit like a refresher course in being patient and thinking long-term,” Mr Moreland -- who has himself built various businesses and now runs an IT company as well as founding Teaminvest -- says of the Berkshire Hathaway meeting.

“The US is on a quarterly reporting cycle and the market is very short-term. But [Buffett] has companies that delist and privatise so they don’t have to do quarterly reporting and can take strategic decisions without shareholder glare.” He adds that Berkshire Hathaway vice chairman Charlie Munger emphasised at the meeting it was more important to focus on sustainability in earnings, rather than size of earnings.

Despite elevated stock prices due to the constant search for yield, Mr Moreland says there are still Australian stocks worth considering. He suggests looking at some of the smaller telecommunications companies and recommends perennial favourite, Commonwealth Bank of Australia.

 “It looks like Woolworths 10 years ago, before their cost cutting,” Mr Moreland says. “Its price-earnings ratio is at the top of its range but its earnings growth profile still looks good and they’re doing back-office cost cutting.”

Still, he concedes opportunities are limited.  “We have a problem in Australia. We’re lacking in companies with long-term, reliable earnings growth, the sort of companies Warren Buffett likes. He has lots of investments in Coca-Cola and other strong brands with long-term growth. We have a few of those, such as Woolworths. In international companies we have even less, maybe CSL, but not a lot. Lots of our companies are cyclical, such as mining services and banks. It’s much harder for us to invest in businesses that he’d class as long-term investments.”

Members of Teaminvest -- which has achieved a return on average of 9.2 per cent a year from 2008 to 2012 on the companies it recommends, compared to a 1.6 per cent fall in the All Ordinaries Accumulation Index over the same post-GFC period -- are also starting to pay more attention to the US and Europe, with about a quarter of the 450 members holding offshore investments. Google and BMW are singled out.

“If you’re brave, you can go to Russia, where stocks trade on about six times earnings,” says Mr Moreland, who bought into "Russian Google" Yandex. “It’s a fantastic business. The share price halved because of the Ukraine issue,” he says.

The meeting revealed that even the heads of the fifth-largest company in the world have to work hard to make sure Berkshire Hathaway is a rational place. “Rationality is really hard because emotions come into it. We’re designed to go with the crowd and when everyone gets scared and runs it’s hard not to,” Mr Moreland says.
Berkshire Hathaway's willingness to tough out stock price fluctuations struck Teaminvest member Michael Stewart, a full-time investor and former business owner, who attended the Berkshire Hathaway AGM for the first time this year. If a stock has crashed because other investors aren’t prepared to pay, but nothing has changed at the firm, then hang on to the stock, he says.

“I’ve come back to the philosophy of not looking at prices at all. There was nothing (at the AGM) about what’s going to happen to the share price of this or that company. It was about the company,” Mr Stewart says. "One key thing about investing is patience and being brave when other people are running away.”

His words echo Buffett’s most recent shareholder letter which proclaims: “Games are won by players who focus on the playing field -- not by those whose eyes are glued to the scoreboard. If you can enjoy Saturdays and Sundays without looking at stock prices, give it a try on weekdays.”

Teaminvest member Peter O’Neil, a company director who also runs a real estate business, has bought into local stocks with low PE ratios and high returns on equity such as property advertising firm REA Group since the AGM, as well as MasterCard. He recommends businesses with an exclusive or top market position, such as Cochlear’s hearing aids.

“You have to buy a growth stock -- the value will catch up," he says, echoing Buffett's advice: “When promised quick profits, respond with a quick ‘no’,” 

Mr Stewart also emphasises the importance of focusing on the quality of a company’s management and the challenges it faces. “I’m interested in what a company is doing and if they do have challenges -- and we’re going to have more challenges over the next few years -- making sure they’re not structural but cyclical.” Quickly sell and take the loss if it is structural, he says.
The importance of a long-term approach is something Buffett reflected on in this year’s letter. He tells of buying a corn farm in Nebraska in 1986 and a property in New York in 1993, with expectations of “solid and satisfactory” gains not only during his lifetime, but that of his children and grandchildren too.

“What the economy, interest rates, or the stock market might do in the years immediately following -- 1987 and 1994 -- was of no importance to me,” he wrote. “Whatever the chatter, corn would keep growing in Nebraska and students would flock to NYU.”