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.
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.
