Warren Buffet is arguably one of the world’s most famous investor. Many know him as one of the world’s wealthiest men who built his remarkable fortune largely through investing through his company, the American conglomerate Berkshire Hathaway. Here at the Motley Fool Singapore, we’ve been touting that looking at great investors is akin to a top scoring student sharing his or her exam tips with you.
So with that in mind, let’s take a look at 3 things that Warren Buffett has taught us from his various discourses through videos, Berkshire Hathaway Annual Reports and books on him.
Sustainable Competitive Advantage
Warren Buffest teaches us to invest in companies with a sustainable competitive advantage. This means that the company must have something that protects its excellent returns on invested capital. One of the famous investments of Warren Buffett that has a sustainable competitive advantage would be Coca-Cola, back in 1988. Coca-Cola has a huge following worldwide and it has a consumer mind-share. It is a well-known brand and it is ubiquitous.
Companies with a sustainable competitive advantage listed in Singapore include Singapore Exchange (SGX: S68), SIA Engineering Company Limited (SGX: S59), DBS Group Holdings (SGX: D05) and Vicom Limited (SGX: V01). SGX needs no introduction. It is a monopolistic business with no competitors. Any investor who wants to buy or sell shares in Singapore will have to go through SGX. Some of us may know SIA Engineering is the engineering arm of Singapore Airlines (SGX: C6L). Whatever aircraft that SIA buys or already owns, it has to be maintained by someone and that “someone” is SIA Engineering. SIA Engineering also provides MRO (Maintenance, Repair and Overhaul) services to 80 other airlines other than SIA. Lastly, DBS is the largest local bank in Singapore (and the largest bank by assets in Southeast Asia) with 4 million customers and it has won many awards like “Best Bank in Singapore” under Alpha Southeast Asia’s Best Financial Institution Awards 2013. Vicom is the largest technical testing and vehicle inspection company in Singapore. The Land Transport Authority mandates all vehicles to go through inspections (depending on the age and type of the vehicle) before the road tax can be renewed.
We should also look for consistency of earnings without gyrations. Predictable products mean predictable profits. Most companies with a sustainable competitive advantage will also have consistent earnings . Vicom has seen consistent earnings in the long-term. The graph below shows the consistency:
Such consistency will be the envy of any business. Vicom could earn such returns due to the oligopolistic nature of the business. Vicom controls 7 of out 9 inspection centres in Singapore while its competitor has only 2 of them.
Avoiding Businesses without Consistent Earnings
Warren Buffett avoided investing in businesses that did not show consistent earnings, and such businesses include commodity businesses. Commodity businesses are businesses that are price-oriented. Commodity businesses may include airline companies, gasoline companies, and car companies. Of course, not all commodity businesses are bad investments, and there have been those which have been proven to be sound investments. However, it just means that it will be more difficult for such companies to generate free cash flow and provide consistent dividends. For example, airline companies tend to have high fuel costs which could eat into the bottom line, and high capital expenditure which may bring down the free cash flow.
Patience is a Virtue
Buffett teaches us that we should be a patient investor. When the stocks are overvalued, it is time to research into the companies we want to buy. Then, we wait patiently for a correction or a market crash to bring prices down to the levels we have eyed the company at. Warren Buffett sat on cash for four years from 1969 to 1973 as he had nothing to buy. In 1973, when there was a market crash, he put the cash to use and quadrupled the money.
Recently, David Kuo highlighted in Take Stock Singapore that he chatted with some outstanding money managers and gleaned some information. He mentioned that these money managers focused on finding good companies. This is certainly what Warren Buffett does. Outstanding money managers invest in business with a sustainable competitive advantage as this allows the business to earn enormous profits. This in turn creates shareholder wealth in terms of capital gains and dividends.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Sudhan P doesn’t own shares in any companies mentioned.