Warren Buffett, the famous American billionaire, has always been known for his value-oriented investment approach. These days there are some very popular UK shares that I reckon he’d avoid at all costs.
The famous investment strategy
As the favourite student of Benjamin Graham, Buffett was focused on finding financially healthy companies selling for peanuts. But then, his investment style changed somewhat. The ‘Oracle of Omaha’ now asks many qualitative questions before buying a stake in a business, in addition to considering the purely financial considerations. Some of the most important factors for him are the firm’s competitive advantage over its peers, the quality of the company’s management, and the industry’s overall chances of success.
But there are also rumours that the latest investment actions taken by Berkshire Hathaway, Buffett’s investment holding company, don’t actually reflect the great billionaire’s own decisions. Some investors even say that his assistants have made many buys and sells the Oracle would never make. They say this about Berkshire Hathaway’s recent investment in Occidental Petroleum, one of America’s largest shale oil companies, for example. This stake was then sold completely after the spring market crash. That kind of move isn’t typical of Buffett, indeed. In fact, the great investor likes buying when everyone sells. And, of course, he likes selling when everyone rushes to buy.
But one of the most untypical Buffett investments was made quite recently. It has always been a taboo for the Oracle of Omaha to invest in IPOs. What’s more, he has always been quite skeptical about high-tech companies. However, quite recently Berkshire Hathaway backed the IPO of Snowflake, a cloud data company. Snowflake’s capitalisation more than doubled over a single trading session. Surely, the company is loss-making and too expensive. In fact, it’s a classical ‘don’t’ for a value investor like Graham or Buffett.
In my view, the billionaire would have never done it in the past. He would’ve not approved of the companies I’ll talk about next either.
UK shares Warren Buffett would probably avoid
Due to the pandemic, many investors have got really keen to buy small healthcare companies specialising in Covid-19 tests. I don’t completely disapprove of this. But, I think, fundamentals should justify valuations. Buying profitable companies with good balance sheets is often smart. It might even seem acceptable to overpay for them a bit. But if loss-making companies are expensive, then buying them is really risky, in my opinion. This seems to be the case with small pharmaceutical firms. Let’s say an effective coronavirus vaccine gets developed by a company or a country. After that, the demand for coronavirus tests as well as Covid-19 treatment will go down. And so will these companies’ shares.
But there are other businesses that are also a bit overvalued right now. They benefit from lockdown-related services. Among them are Ocado and Just-Eat-Takeaway, for example. I have nothing against these two companies. They have sound competitive positions. What’s more, they have been operating for a long time. But their valuations are too high for me. So, before jumping in I’d expect their shares to drop somewhat.
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Anna Sokolidou has no position in any of the shares mentioned. The Motley Fool UK has recommended Just Eat Takeaway.com N.V. and Snowflake Inc. 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.