Beating the stock market on a consistent basis, over a long period is a difficult task. Maybe almost impossible. However, Warren Buffett and his partner Charlie Munger are among very few investors who have ever achieved such a feat. His fund, Berkshire Hathaway (NYSE: BRK.A) has outperformed the S&P 500 by almost 3,000% since its inception! So, here’s how he does it.

Quality is invaluable

It’s no secret that Warren Buffett only invests in quality stocks that provide good value. Over his decades of investing, he’s reiterated that a good investment has three main factors:

1. A good valuation with room for growth.
2. Strong pricing power and fundamentals.
3. An excellent moat with a margin of safety.

This is evident when analysing his company’s portfolio. The firm has positions in many of the world’s biggest companies. Many of these stocks have one thing in common. They’re market leaders that exhibit quality profit margins and healthy fundamentals.

A buffet of stocks

As the US S&P 500 flirts with bear market territory, the Oracle of Omaha has been going on a shopping spree. Warren Buffett has been buying shares in excellent companies for cheap valuations, having done the same during the 2008 financial crisis. He’s made mistakes in his investing career too, but he learns from them and moves on.

Be fearful when others are greedy, and greedy when others are fearful.

Warren Buffett

The current forward price-to-earnings (P/E) multiple for the S&P 500 stands at 16.6. This is below the five-year average of 18.6, and 10-year average of 16.9. As such, Warren Buffett has increased and even bought positions in several blue-chip stocks. These include PC giant HP, oil behemoths Chevron and Occidental Petroleum, and recently, entertainment conglomerate Paramount Global.

These purchases allow Warren Buffett to dollar cost average, as he continues to buy value stocks on the dip. Berkshire’s move to increase its stake in oil also allowed the firm to capitalise on sky-high oil prices. This has allowed the fund to hedge against the potential slowdown in earnings from its other positions. Consequently, Berkshire Hathaway has outperformed the S&P 500 by almost 20% this year.

Keeping it simple

Warren Buffett has always stressed on keeping investing simple. Buy shares in a great business for less than it’s worth, with managers of the highest integrity and ability. But what is a great business? As hinted at earlier, these are businesses with low debt, high levels of cash, healthy margins, strong growth, and an inelastic good/service. While this may seem simple, companies exhibiting all these traits are difficult to find.

So, despite already having an array of renowned names on his portfolio, the 91-year-old has expressed his regret in not purchasing shares of several top US companies. One is a personal favourite of mine, Alphabet. Although the tech giant came short of earnings expectations recently, he sees plenty of promise in the Google-owning firm. With a 20-1 stock split around the corner, I think Berkshire may add Alphabet to its portfolio. If so, I’d be even more confident in Warren Buffett’s ability to continue beating the stock market.

The post How does Warren Buffett beat the stock market? appeared first on The Twelfth Magpie.

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John Choong owns shares of Alphabet (Class A Shares) at the time of writing. Bank of America is an advertising partner of The Ascent, a Motley Fool company. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. American Express is an advertising partner of The Ascent, a Motley Fool company. The Motley Fool UK has recommended Alphabet (A shares), Alphabet (C shares), and Apple. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Investing guru Warren Buffett recently purchased an 11.4% stake in HP (NYSE: HPQ) for his holding company, Berkshire Hathaway. The purchase now makes him HP’s biggest shareholder. To be clear, Hewlett-Packard split its business into two divisions in 2015. Hewlett Packard Enterprise would sell servers and enterprise services, while HP Inc would sell PCs and printers. Warren Buffett opted to buy shares in the latter. On the day his purchase was announced, the HP share price spiked by 15%. Nonetheless, it has since come back down to a more reasonable price. With Warren Buffett’s impeccable track record of beating the market, I will be diving into HP’s fundamentals and prospects to determine whether I will be buying HP shares for my portfolio.

Low HP

Warren Buffett has always preached his main investing philosophy. He encourages only buying shares in companies that have solid balance sheets, quality earnings, and strong pricing power. This is why I was left surprised when I saw his holding company acquire $4bn worth of stock in HP.

HP’s balance sheet certainly isn’t in a healthy position. With a -304.4% debt-to-equity ratio, the tech company has negative shareholder equity. This means that the company’s liabilities exceed its assets. Its cash and equivalents are not sufficient to cover its debt either, with only $3.4bn in cash and $7.1bn of debt. As a result, I am left scratching my head, as HP’s balance sheet doesn’t add up to the fundamental investing strategy of Warren Buffett.

Printing money

Nonetheless, the silver lining in HP’s dire balance sheet is that it manages to generate quality earnings. Since Q1 2021, HP has managed to grow its revenue and profit margins. The firm went from a 5.6% profit margin to 10.1% in its most recent quarter. In addition to that, HP has shown its intention to continue growing its business. Just last month, HP announced its acquisition of Poly, a voice and video solution company. This should boost HP’s growth strategy, as it aims to build a leading portfolio of hybrid work solutions.

More importantly, HP trades at a low price-to-earnings ratio of six, while also paying a decent dividend of $0.25 per share. It is perhaps for those reasons that Warren Buffett opted to invest in one of the world’s biggest PC manufacturers, as he expects HP to continue generating compounding amounts of free cash flow.

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Unfortunately, that is all the good news I have for HP. Despite the positives of the company, there are worrying trends that the PC giant faces. For one, market analysts are forecasting that PC growth will slow down considerably as inflation continues to eat away on consumers’ income. It doesn’t help either when UBS gives HP a stock downgrade, citing weakening demand for HP products, with Wall Street also expecting the S&P 500 company to see a decline of 12.4% in its earnings. Moreover, HP isn’t the market leader as it trails its rival, Lenovo, giving it less pricing power.

As such, despite HP’s value proposition, I don’t think the stock will be performing considerably well for the foreseeable future. The company’s balance sheet also leaves much to be desired, which is why I will not be buying HP shares for my portfolio any time soon.

The post Warren Buffett just bought HP shares. Should I buy? appeared first on The Twelfth Magpie.

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John Choong has no position in any of the shares mentioned at the time of writing. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Successful investing is as much about avoiding duds or taking on too much risk as it is picking winners. It’s why Warren Buffett and his business partner Charlie Munger are two of the wealthiest individuals on the planet.

As the latter once remarked: “It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.“

Today, I’m going to focus on two UK growth stocks that, thanks to the ‘Sage of Omaha’ and his colleague’s advice, I thankfully never fancied and still don’t. 

70% down!

I was sceptical about global review platform Trustpilot (LSE: TRST) when I first looked at it last September. At the time, the share price had soared 70% or so since its IPO earlier in the year.

Despite such impressive gains, I just couldn’t shake the feeling that it lacked an ‘economic moat‘. This is a term coined by Buffett to describe a business with sufficient competitive advantages to consistently fight off rivals. Might it be possible to copy what Trustpilot has done with sufficient capital and eventually steal its crown? I believe it is. 

But this wasn’t the only red flag for me. As well as being concerned about the potential for Trustpilot’s review system to be abused by bad actors, I was wary that the company was not making a penny in profit. 

Since then, the shares in this growth stock have tumbled almost 70%!  

Trustpilot isn’t without promise. Back in January, the company announced it expected FY21 annual recurring revenue to hit $144m. That’s a sizeable jump from the $119m achieved in the previous year. Based on this, investors might suggest the stock is a potentially lucrative contrarian pick.

With the rotation into value showing no sign of abating just yet, however, the outlook for the share price looks pretty bleak. Like Warren Buffett, I’d prefer to stick to proven quality stocks rather than take on the additional risk here.  

Another struggling growth stock

A second company I’m steering clear of is furnishings and homewares retailer Made.com (LSE: MADE). Just the fact that I’ve never looked at this growth stock until now speaks volumes.

While investors in Trustpilot enjoyed early gains, anyone backing this other relatively new stock will only have seen their stake sink in value. From a 52-week high of 214p, Made.com’s shares are now languishing at 73p a pop.

Again, the lack of economic moat strikes again. With so much competition, is there anything that will compel me to only shop with Made? Not at all. Contrast this with Buffett’s huge holding in Coca-Cola. The owns so much of the beverage titan because he knows a lot of people refuse to drink any other brand. This advantage arguably makes it far less risky. 

On top of this, the rise in the cost of living can’t be good for business. The boom in home improvement we’ve seen since the pandemic arguably peaked long ago too. Yesterday’s news that CEO Philippe Chainieux is stepping down is another unfortunate development.

With a market-cap now below £300m, perhaps the fall has been overdone. The website certainly looks slick and Made appears savvy when it comes to social media. For me however, this mostly presents as another unprofitable story stock that was opportunistically listed. 

The post I’m listening to Warren Buffett and avoiding these growth stocks like the plague! appeared first on The Twelfth Magpie.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Don’t sweat the numbers (too much)

As a private investor up against paid professionals, it’s easy to assume you must perform a huge array of financial calculations to match their performance. Munger thinks otherwise. In his view, “people calculate too much and think too little.“

For Munger, finding a great business is as much about looking at it from a qualitative perspective as it is about the numbers. Why might the company rise above the competition? What’s the CEO’s plan to grow the company over the next five years? What are its biggest threats?

Taking a holistic approach will allow you to see things ratio-obsessed analysts might miss. 

Dump the rubbish

Successful investing takes time and energy. We’ve finite amounts of both. Knowing this, Munger advocates being ruthless when looking for opportunities. “We have three baskets for investing: yes, no, and too tough to understand,” he’s said.

Linking in with Buffett’s idea of finding your circle of competence and staying there, Munger is quick to disregard weak businesses, or those whose models are overly complex.

On an anecdotal note, this is why I tend to give banking stocks a wide berth. For me, the potential profits aren’t worth the hassle of wadding through convoluted financial statements. Put, say, a video game developer in front of me, however, and I’m more interested. Here, the business model and financial statements are relatively easy to comprehend.

Many of the UK’s best fund managers use a similar strategy to Munger. Despite the many thousands of stocks available to him, Terry Smith says his investable universe is restricted to around 80 stocks. Even then, only 30 or so make it into the highly successful Fundsmith Equity Fund. Buy the best, discard the rest.

Be patient

One of the key tenets of Munger’s philosophy is only investing in things you can commit to for the long term. For him, “the big money is not in the buying and the selling, but in the waiting.“

Unfortunately, this is easier said than done. Thanks to online share-dealing, we’re able to pick up and jettison stocks on a whim, sometimes paying no commission. Add in a significant global event like the coronavirus pandemic and looking beyond the next few months is even tougher.

Learn to master your desire for immediate results and reap the rewards later down the line.

Question everything 

It’s remarkably easy to fall in love with a stock, especially when it’s one that’s already making you money. Take a look at the excitement surrounding market darling Tesla, for example. 

Munger, however, suggests investors remain vigilant and continually question their holdings. “You must force yourself to consider opposing arguments. Especially when they challenge your best-loved ideas.”

Fail to do as Munger advises and you open yourself up to confirmation bias — only searching for evidence that supports your thesis. 

There’s nothing wrong with being confident in your stock picks, of course. Just be willing to change your mind — and your portfolio — if the facts change.

The post Have money to invest? I’d follow Charlie Munger’s top tips to get rich appeared first on The Twelfth Magpie.

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Paul Summers owns shares in Fundsmith Equity Fund. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Warren Buffett and his right-hand man Charlie Munger have made tens of billions of dollars by investing in the stock market, and if you read through their annual correspondence to investors, as well as listening to interviews with these two mega-investors, it becomes clear that a large part of their strategy is based on simplicity. 

You don’t need to be a genius 

Munger is the most prominent advocate of simplicity in investing.

Before Buffett and Munger became partners, Buffett was content with his strategy of buying stocks trading at deep discounts to intrinsic value. However, Munger convinced him to change his approach to purchasing high-quality businesses at reasonable prices, sitting back and watching the money roll in.

This investment style isn’t glamorous (most of the time there’s nothing to do), but it’s highly profitable. As my Foolish colleague Zach Coffell highlighted in an article last year, Munger claims that the key to successful investing is to do nothing 99% of the time, but aggressively seize the 1% opportunity. 

But there are to other elements to Munger’s strategy that are often overlooked. 

Don’t be stupid 

Investing in the market’s best companies is relatively easy compared to the desire to chase investment fads and trends. That’s why Munger believes that the single most crucial element of an investment strategy is to be “non–idiotic”, or to put it another way, in order to be a successful investor you have to avoid making stupid mistakes. 

This might seem obvious at first, but it’s hard to put into practice. For example, there’s an overwhelming volume of research which shows that cheap stocks outperform the market over the long run. However, the data also shows that during the depths of the financial crisis, when equities were trading at the lowest level in a decade, investors were rushing for the exits. Buffett and Munger, knowing that the data was correct, dived in and have made billions as a result. 

Being “non-idiotic” also means avoiding highly speculative investments. 

Most companies trading on the AIM market are highly speculative and in their early stages of growth. The risk of a total capital loss here is high, and the chances of you finding a 10- or 20-bagger are slim. So, why take the risk? 

If the odds are stacked against you, you’re taking an unnecessary risk. If experienced investors such as Neil Woodford struggle to find winning small caps or private early-stage businesses, then individual investors will really struggle. 

Stick with what works 

Munger’s strategy is about sticking to knowing what works. 

We know investing in high-quality companies produces steady long-term returns with minimal risk of total capital impairment. So why should we try to beat the market using a strategy that’s untested?

Investors can’t control the market, but they can skew the odds of success in their favour by using proven strategies, not taking unnecessary risks, and letting the magic of compounding do all the hard work. 

The post Making a million could be easier if you invest like Warren Buffett’s partner Charlie Munger appeared first on The Twelfth Magpie.

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

I’m in good company because dynamic duo Warren Buffett and Charlie Munger also favour capital-light businesses. Here’s the latter explaining why: “We prefer businesses that drown in cash. An example of a different business is construction equipment. You work hard all year and there is your profit sitting in the yard. We avoid businesses like that. We prefer those that can write us a cheque at the end of the year.”

I believe profits should explode at Auto Trader (LSE: AUTO) and Craneware (LSE: CRW) as revenue growth outpaces reinvestment requirements. 

Tripling that year-end cheque

Auto Trader is the UK’s largest online pool of car buyers and dealers. The sheer size of this network means there’s little reason for customers to go elsewhere when looking to make a car purchase. It is much like ASOS, Amazon, or Spotify – a one-stop shop with clear advantages derived from the critical mass it has reached. As a seller, you’d be foolish to side-step it too, because you’d be voluntarily turning down a massive market. 

Upwards of 65% of UK used-car sales are completed through its portal, including 8.2m cars sold in the 12 months to March 2017. New car sales have been falling recently, which could place near-term pressure on Auto Trader as fewer people replace old cars. But over the long term, I believe its exceptional economics will drive solid returns. 

The virtual marketplace itself doesn’t require much capital to host, which facilitates the company’s incredible 65% operating margin. This wonderful profitability supported a more-than-tripling of the dividend in 2017, from 1.5p in per share to 5.2p. The company generated over £170m in free cash flow last year, leaving the shares trading at only 20 times free cash flow. This might not sound that cheap, but given the company’s pricing power and high margins, I believe this to be a fair price for a great business. 

Deeply embedded technology

Craneware is another business with low capital requirements. It supplies cost-saving software to US Hospitals and recorded a 27% operating margin in the first half of this year. The company’s software is deeply embedded in many areas of hospital management and switching to a rival could result in major disruptions to mission critical functions. 

Trump’s repeated failure to repeal and replace Obamacare has removed some of the uncertainty hanging over the company’s products. This, combined with generous free cash flow and a market-dominating competitive position means Craneware is well-placed to generate exceptional shareholder returns. 

The low-cost nature of the business means that incremental revenue growth largely falls through to the bottom line, so I expect margins to expand over the next few years. The company’s dollar renewal value, which more often than not comes in at over 100%, indicates that there is little client churn and that the company has enduring pricing power. 

Craneware expects to report full-year revenue growth of 16% and EBITDA of $18m. The market cap of £350m is definitely on the expensive side, despite the company’s $50m cash pile, so the company might best be watched for now. 

The post Why profits should explode at these capital-light businesses appeared first on The Twelfth Magpie.

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Zach Coffell owns shares in Craneware. The Motley Fool UK has recommended Auto Trader and Craneware. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes

I love The Sage of Omaha as much as the next Fool, but I reckon you can learn just as much, if not more, from the calm and concise foil to Buffett’s endless enthusiasm, Charlie Munger. 

Sanguine selectivity

Buffett often reminds we do-it-yourself investors that we aren’t playing baseball. Unlike his favourite sport, we can let literally thousands of (investment) pitches pass us by without being penalised.

But it would seem Buffett himself gets a little tetchy when he’s inactive too long. Warren refers to Munger as “The Abominable No Man,” because he’s always knocking back his ideas. The key to successful investing, Munger claims, is the ability to do nothing 99% of the time, combined with an ability to aggressively seize that 1% opportunity, of which the average investor can expect to encounter only a few in their lifetime. 

How do we know when we’ve found that fateful investment, however? Well, Munger advises you only invest when you are certain you have the advantage. Otherwise, its back to doing nothing for you.

That means avoiding sectors and companies you don’t fully understand, while spending your downtime growing your “circle of competence,” or areas of expertise. Continuous learning is essential to the long-term investor, so stop reading broker forecasts and sit down with a book.

The Importance of Scale

Scale is important, as every investor knows. I won’t teach you to suck eggs but there are a few benefits beyond cheaper materials that some investors miss. 

Firstly, the larger a company is the more money it can afford to dedicate to marketing spend, meaning size alone acts as a barrier to entry; without significant funding, a start-up brand can’t get adverts on mainstream TV, but the big boys can. 

Similarly, an independent shop must trial one strategy at a time, whereas shopping empires like Tesco can treat its empire like a laboratory, simultaneously testing a number of new ideas or formats while leaving other stores unchanged to act as a control. 

But, for all its advantages, Munger points out scale itself just isn’t enough. After all, even the larger airlines are often heavily lossmaking. Munger advises we ask who benefits from scale: the customers or the shareholders? 

He learnt this lesson through then-textiles business Berkshire Hathaway. He recalls a breakthrough loom that could potentially double the output of the business. Rather than viewing it as an advantage, Munger and Buffett considered shutting the place down there and then. 

Anyone can sell textiles, which meant the only way to compete was by lowering price. This new loom would increase productivity for everyone involved in the industry, which would inevitably lead to a slew of price cutting as each business once again struggled to differentiate itself. 

Besides, the new technology was seriously expensive. In this instance, the customer reaped the reward of heavy investment, not the company itself. Therefore, Munger advises against investing in commodities, or products that any man and his dog can produce. The inevitable race to the bottom on price will erode your wealth. 

The post Forget Warren Buffett — to smash the market, emulate Charlie Munger appeared first on The Twelfth Magpie.

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• Forget meal deals! Here’s how £8 a day could be worth £357,000
• Up 132% and surging, how is this FTSE 250 share STILL so cheap?