Over the course of his career, billionaire investor Warren Buffett has been spectacularly successful in identifying brilliant shares.
A lot of the focus has been on US shares as Buffett is well-known for his seemingly eternal bullishness on the long-term outlook for America. But the ‘Sage of Omaha’ has also dipped his toe in the London market from time to time.
By toe-dipping, I mean investing hundreds of millions of pounds! Buffett has the sort of cash at his disposal that small private investors like me can only dream of.
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Still, by looking at some of his UK investment decisions, I think I can learn some lessons (as, indeed, has Buffett).
Tesco
The biggest lesson is probably the investment in Tesco (LSE: TSCO). Buffett has long experience with retail. Indeed, even as a boy he was a familiar presence in the Omaha general store his grandfather founded. Buffett later invested in a wide variety of retail-linked businesses, including the wholesale distributor McLane that he bought from Walmart.
At face value then, his Tesco move was classic Buffett. He stuck to a market he understood and in which there was likely to be resilient long-term demand. He opted for a company that had a proven business model. Then, as now, it was by far the biggest grocery operator in the UK in terms of market share.
Beginning in 2006, Buffett built a stake that led to his firm Berkshire Hathaway becoming Tesco’s third largest shareholder. He hung on despite a profit warning. And another. And another. And another.
Buffett started offloading his Tesco stake in 2014 at a huge loss when Tesco was embroiled in an accounting scandal (now long-since resolved).
Accounting misstatements can be hard or impossible for even a sophisticated, experienced investor to spot. Still, Buffett made a mistake here, by his own admission.
“I made a big mistake with this investment by dawdling,” he told Berkshire shareholders. There were signs that Tesco faced problems – the profit warnings. Buffett was slow to react.
Diageo
Diageo (LSE: DGE) is an odd name for a company. It came about through a merger between Grand Metropolitan and Guinness. Buffett started buying Guinness shares back in 1991 and it was Berkshire’s first large investment in a non-American company.
What was the rationale? “Guinness earns its money in much the same fashion as Coca-Cola,” he explained.
He later sold the stake (although Berkshire subsidiary Gen Re currently holds Diageo shares) but the initial appeal is clear. Like Coca-Cola, Diageo has a large global addressable market. By building unique brands, from the Irish stout to Johnnie Walker whisky, it is able to build customer loyalty and exert pricing power. Like Coca-Cola, it is a Dividend Aristocrat that has raised its dividend per share annually for decades.
Lately, there have been wobbles. Sales in Latin America have been disappointing and the company is contending with a shift to non-alcoholic drinks by younger consumers. But I see a lot to like in Diageo shares and plan to keep holding them in my portfolio.
