Warren Buffett is a legendary investor with decades of investing success. He has delivered an average annual return of 20% since 1965. That’s an amazing track record and why I always listen to what he has to say.
Over the years, Buffett has provided many words of wisdom. For instance, he thinks investors should focus on high-quality companies and understand that price is different to the underlying value of the business. That’s a really important point, especially in times of stock market turbulence like we have now. His advice is to buy quality shares when they’re marked down in price.
Warren Buffett’s signs of quality
So which shares would the Oracle of Omaha consider to be good quality? One measure of business quality is return on capital employed. Another popular investor Terry Smith also mentions this metric a lot. It’s a ratio that measures how efficiently a company reinvests its assets. High returns on capital employed can be a sign of an economic moat, another term popularised by Warren Buffett. A moat is effectively a sustainable competitive advantage. For instance, it could be a strong brand like Apple. Or it could have a dominant market position like Alphabet‘s Google that makes it difficult for competitors to take a chunk from its business.
Quality UK shares
One UK share that I’d consider to be high quality is online property portal Rightmove (LSE:RMV). It currently has a phenomenally high return on capital employed of 186%. That’s the highest figure in the FTSE 100. Usually I’d happily consider any company with over 20%. I reckon Rightmove has a strong economic moat in the form of its brand. It’s often the first place house-hunters turn to when looking for a property to buy or rent. Yes, there’s competition and a risk that other portals could offer discounts to tempt estate agents away from Rightmove. But, I reckon it will ultimately be number one. Its share price has taken a dive so far this year, tumbling by 20%. That almost reverses last year’s 23% gain, but I’d say it could be an opportunity for me to buy a quality company at a marked-down price.
In the driving seat
Another online platform that demonstrates quality characteristics and a moat is Autotrader. As the UK’s largest digital vehicle marketplace, it’s often the first place car buyers visit online. It has wonderful quality characteristics, with a return on capital employed of over 50% and operating profit margin of over 65%. Yes, competition from the likes of eBay could potentially affect sales and profits. But overall, Autotrader is a widely recognised brand and as long as it maintains visitor engagement, it should be able to stay in the driving seat for many years.
Another famous quote by Warren Buffett is, “Be fearful when others are greedy, and greedy when others are fearful”. There’s certainly some fear in the market right now. It’s difficult to tell if investors will become even more fearful and mark share prices lower. But if they do, I’ll be ready with my list of quality shares. Hopefully I’ll be greedy enough for Buffett.