I recently bought shares in a leading UK company. In making my decision, I was thinking through some of the principles that legendary stockpicker Warren Buffett espouses. I used them to help me pick the company in which I invested. Here I explain how.
Think that you’re buying a slice of a company
It’s easy to see shares just as a slip of paper with a monetary value. But Warren Buffett reckons it is more appropriate to think of them as a slice of the company. It may be a very small slice, of course, but it is still part of the company.
So, instead of just looking at the share price chart, Buffett first asks whether he likes the company and thinks it is attractive to invest in. For example, does it have a strong business model, can it increase prices rather than be forced to cut them, and how large is its defensive moat?
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That was what I considered in making my choice to buy into Unilever (LSE: ULVR). With its global footprint, technology in everyday products used by billions of consumers, and pricing power, Unilever is the sort of company I think Buffett would like to own. Indeed, he tried to buy it several years ago. It’s the sort of company I decided I would be happy buying a slice of.
Value brands for their long-term payback
Buffett has invested in a lot of companies with strong brands. One of his most famous investments is Coca Cola, a share he has said he would be happy to keep forever. But he is also a holder in American company Procter & Gamble. Like Unilever, it has a lot of personal care and cleaning brands.
One reason Buffett is so attracted to brands is because they give a company pricing power. Instead of being a price taker, forced to accept whatever the market says the price of a commodity is, a brand allows a company to differentiate its product from competitors and so set its own price. A company like Unilever can see profits fall as input costs rise. So pricing power can be helpful.
Another reason brands are attractive to investors like Buffett is because they pay back over the long term. Unilever’s decades of brand building efforts through advertising will continue to drive brand loyalty in future, even if they do not spend any more money on it.
Warren Buffett likes to invest in the company, not the management
Unilever shares have fallen lately and currently offer a dividend yield of 3.9%. That is quite high for a FTSE 100 stalwart. I think that partly reflects investor nervousness that the pandemic sales boom will end, combined with nervousness about the company’s leadership quality.
I think the leadership is good, but actually I wouldn’t worry too much even if it wasn’t. Buffett as a business leader himself of course likes high-quality leadership. But he doesn’t think it’s necessary. He says that rather than investing in a business purely because of its leadership, it makes sense to invest a business which has such a strong business model it could survive even with bad leadership. What clicks with me about Unilever is its strong market position and brand portfolio. Good leadership is a bonus.
