A whole book could be written on great Warren Buffett quotes. He’s certainly the most cited (and citable) investor who’s ever existed. Though his words are often simple, there’s great wisdom to be gleaned from them.
Here are four elements of his investing philosophy (with quotes) that led me to consider adding Experian (LSE: EXPN) to my holdings.
Buy wonderful companies
“Time is the friend of the wonderful business, the enemy of the mediocre”.
Buying wonderful companies sounds simple and obvious, but this principle is too often ignored by investors. Following this principle makes my job so much easier because it disqualifies many stocks straight away.
It helps me rule out mediocre companies with no competitive advantages. It rules out most penny stocks for me because they’re not yet generating meaningful revenue. And it certainly disqualifies smouldering wrecks like Cineworld. Basically, it massively reduces the size of the pond where I fish for stocks.
I think Experian qualifies as a wonderful company. It is a data and analytics specialist with a dominant position in its industry. It collects and aggregates credit information on over 1.4bn people and 191m businesses worldwide. That includes over 235m individual US consumers.
It hasn’t become so successful (and trusted) over time without being wonderful at what it does.
A deep moat
“A good business is like a strong castle with a deep moat around it. I want sharks in the moat. I want it untouchable”.
Experian’s business model is very powerful. Lenders give Experian raw credit history data for free, then this data is analysed and sold back to them in the form of a credit report. Banks, credit card companies, and landlords are some of the types of customers that rely on Experian.
Every time it receives and aggregates more data, Experian’s competitive edge is reinforced. This vast amount of credit information adds up to a very deep moat around the company. Good luck to new competitors attempting to gather the data necessary to unseat Experian!
Profits and dividends
“We all hope for capital gains, but the only thing we can really count on is the dividend”.
Experian is a profitable business. It has an operating margin of around 23% and an overall profit margin of 18%. The dividend yield stands at around 1.6%. I think Warren Buffett would approve.
Mr Market
“Be fearful when others are greedy and greedy only when others are fearful”.
Mr Market is a fictional character invented to highlight the seemingly irrational daily moves in share prices. ‘He’ is extremely erratic and prone to mood swings, offering us high prices one day then low prices the next. This is obviously relevant to today’s markets, where the selling often seems indiscriminate.
Buffett advocates greedily buying shares while fear is running high. The share price of Experian is down 26% in 2022. It now has a price-to-earnings (P/E) ratio of 23, which still isn’t cheap compared to most companies.
But it’s a cheaper valuation than Experian has generally traded at, and it could get even cheaper if markets fall further. I’d like to start accumulating shares of this wonderful business while others are fearful.