There are many things Warren Buffett looks for when investing in a company, but three stand out to me. The first is that it must be an established business, which means there’s a degree of reliability and predictability in its earnings. No risky biotechnology stocks for Mr Buffett. The second is that the shares must be trading cheaply, which means he’s not overpaying for them. This establishes his famous margin of safety principle. Finally, the stocks should pay a dividend, which he can put to work elsewhere to make further money.
Much of the FTSE 100 is made up of established businesses that trade cheaply and pay a decent dividend. So what’s up here, and should we be following the world’s greatest investor in avoiding the British stock market?
America first
Berkshire Hathaway is the American holding company owned by Warren Buffett, and as such most of its stock investments are in US companies such as Apple, Bank of America and Coca-Cola. Yet there’s nothing preventing Buffett from investing anywhere in the world. He currently has small positions in Brazilian stocks and has previously put money to work in China.
With regard to the UK, Buffett said in 2019: “We’re never going to understand any other culture or the tax laws or the customs as well as the US, but we can come awfully close in Britain.” It’s somewhat curious, then, that Buffett has not gone shopping for UK stocks since this comment, especially after the recent market decline.
Mixed UK record
Buffett has previously invested in the UK stock market, albeit modestly. In 2015, he sold out of his stake in Tesco, which he’d first bought in 2008. During this time, Tesco shares lost 60% of their value. Buffett admitted to his Berkshire Hathaway shareholders that his investment in the supermarket giant had been a ”huge mistake”. In 2017, Kraft-Heinz, the giant US food group with Warren Buffett as the major shareholder, attempted a hostile takeover of Anglo-Dutch rival Unilever. This attempt failed.
In fairness, Buffett has had successful exposure to the British economy through Berkshire Hathaway’s fully owned insurance companies, which have various operations and customers in the UK. His company also owns Northern Powergrid, which distributes electricity to households and businesses across the north of England, and has also been a success.
Maybe this mixed past record partly explains the Oracle of Omaha’s hesitance to invest in the UK today.
Follow your inner scorecard
So should I follow Warren Buffett and also avoid the UK stock market? Not necessarily. And, strangely enough, it’s Buffett’s own advice that would still make me buy UK stocks. That’s because he advises investors to follow what he calls their own inner scorecard. Put simply, this means following your own standards, setting your own targets, and doing what’s right for you. When you keep an inner scorecard, you define what success looks like, nobody else.
I try to keep my own inner scorecard as an investor, and learn from Warren Buffett rather than copy him. So, for that reason, it doesn’t concern me that he continues to ignore UK stocks.