Among AIM's very largest shares, these companies have very distinctive business models.
You don't need me to tell you that Warren Buffett is one of the world's most widely quoted investors. And few of us haven't come across one of Buffett's most popular quotes: "Rule number 1: don't lose money. Rule number 2: don't forget rule number one."
It's a quote that's usually trotted out to highlight Buffett's investing performance. For while Berkshire Hathaway does lose money, it does it only very rarely. Between 1965 and 2006, for instance, Buffett experienced only one loss-making year: 2001 -- pretty good going for a 40+ year performance.
What is less well appreciated, though, is why Buffett is so keen to avoid losses. In short, it's not because he hates red ink -- it's because he understands all too well the impact of incremental losses on overall investing performance.
Here on The Fool, we've always been keen on the notion of compounding. In short, slow, steady, consistent returns build up over time to a hefty gain. It's why we're such fans of index trackers, for instance -- and of low-cost index trackers in particular.
Warren Buffett has much the same view of things. According to Buffett's official biographer Alice Schroeder, it's actually why her biography was entitled The Snowball. Snowballing, she explains, "is really a metaphor for compounding, for the way that things tend to grow at an exponential rate when they are rolling forward over time".
And a loss -- even a small one -- is a bit like that snowball hitting a bump that slows it down. And we don't want that.
Because Buffett understands all too well that it's difficult to recover from losses. If your portfolio goes down by 50%, from that point it will then take a 100% percent return just to get back to where you were.
Which, in simple terms, is why Buffett likes big businesses: they're less volatile, and less likely to go pop. In Buffett's book, the investor should go for businesses that deliver outstanding returns on capital, which produce substantial cash profits, and which possess a huge economic 'moat' to protect them from competitors.
It's why, for instance, he bought railroad company Burlington Northern Santa Fe Corp -- yes, all of it, at a price tag of $34 billion.
In short, Buffett buys great businesses, businesses that throw off substantial amounts of cash, and that happen -- ideally -- to be priced very attractively at the time of purchase.
But AIM-listed businesses don't often fit that description. They might be great businesses tomorrow -- but they're not necessarily great businesses today. And what they're most obviously lacking is size.
Finding tomorrow's great businesses
That said, take a look at AIM, and it's not difficult to spot businesses that meet other Buffett criteria; one being 'moat', for instance, which is Buffett's term for a business's long-term sustainable competitive advantage.
Setting a up a brand new competitor to Burlington Northern Santa Fe Corp, for instance, is going to be a pretty costly business. Likewise Coca-Cola (NYSE: KO.US). Not to mention IBM (NYSE: IBM.US), Procter & Gamble (NYSE: PG.US) and Kraft Foods (NYSE: KFT.US) -- each of them also top 10 Buffett holdings.
But such businesses didn't arrive at their present sizes overnight. A beaten-down British business that Buffett is currently loading up on, for instance, was founded in 1919 -- although these days it's the 16th-largest company in the FTSE 100 (UKX).
Its name? This and more is revealed in our free special report -- "The One UK Share That Warren Buffett Loves" -- which can be in your inbox in seconds. As I say, it's free, and without obligation, so what have you got to lose?
Boring but beautiful
So does London's AIM market possess any Buffett-style shares that simply lack Buffet-style size today -- but which might grow over time? I thought I'd see.
Sure enough, five very interesting-looking business can be found among the 20 largest shares on AIM, each with a definite and undoubted moat. Unexciting they may be -- but heck, so is selling sugared water, processed cheese and cleaning liquids.
|ASOS (LSE: ASC)||£1.4bn||Online retailing|
|James Halstead (LSE: JHD)||£568m||Flooring|
|Mulberry Group (LSE: MUL)||£862m||Upmarket fashion|
|Monitise (LSE: MONI)||£301m||Mobile payments|
|Majestic Wine (LSE: MJW)||£292m||Wine retailing|
Nor are these necessarily tiny minnows: the largest business listed on AIM right now, Gulf Keystone Petroleum (LSE: GKP), boasts a market capitalisation north of £2 billion, and all five picks are reasonably-sized.
Want to know more? They've all been covered here on the Fool before, so click on the ticker to pull up Foolish comment and analysis.
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More investing ideas from Malcolm Wheatley:
> Malcolm doesn't hold shares in any of the companies mentioned.