Lessons From Warren Buffet’s Investment Style For British Investors In 2020

  • Mar 15, 2020 GMT
  • Team Kalkine
Lessons From Warren Buffet’s Investment Style For British Investors In 2020

There is a difference in the way investing is approached in The United States of America and the United Kingdom. In the United Kingdom, star fund managers and their stock-picking skills have gained more public adulation compared to passive styles of investing. In the United States, however, large investment management corporations Like BlackRock and State Street Global Advisors have attained prominence on the back of passive investment style of tracking the index in order to achieve investment returns and to transform themselves into massive enterprises managing investor wealth. Both investment styles, though contrary to each other, have had their fair share of glory and are backed by sound logic to be offered to investors to choose from. The objective is to create the maximum possible value from the portfolios managed by active and passive fund managers.

The British economy will be entering into a new era in 2020 as it has recently moved out of the European Union and its policy framework on 31 January 2020. The country, which parted ways with the European Union on the plank that the Union was hindering its growth, has very aggressive strategies to accelerate the pace of development of the economy. There has also been news that the present government is planning a massive £1 in trillion public expenditure to leapfrog the country into a new era of economic and technological development which, if confirmed, will put the country on a growth path which is similar to that experienced only by some of the select few developed countries in the world.

Transformative changes will also come to the capital markets in the United Kingdom. The new era will bring with itself a new set of possibilities giving investors in the country the opportunity to rebuild their portfolio to the user in greater efficiencies and discipline. At this juncture, five investment advises of acclaimed American investor and investment guru, Warren Buffet, are worth taking note of.

  1. Never Compromise on Business Quality – The first and the most valuable advice of Warren Buffett is to invest in good businesses. The urge to make windfall gains can only lead to speculation and is never accompanied by solid fundamentals of the underlying business, whose securities are being traded. An excellent underlying business will always deliver in the long run while speculative investment strategies statistically even out in the long term with nil net returns coming into the hands of the investors. Low-quality businesses, on the other hand, might entice some investors to buy the shares of these companies as they could be trading cheaply, but experience suggests that the evolving situation for such companies are more likely to get worse than getting better.
  2. When making an investment, plan to hold it forever – Moving in and out of stock quite often does not allow for its full investment potential to be extracted. Warren Buffet’s most famous investment strategy is to buy and hold the stocks for an extended period of time. Most of the fortune he made in his career by investing in stocks was by following this strategy. Moreover, high trading activity eats up into the investor’s margins, forcing him to adopt more risky investment strategies which often lead to substantial investment losses.
  3. There is difference between price and value – The cost of a stock on a particular day on a stock exchange is determined by the combined actions of the buyers and sellers and may or may not be reflective of the value of the underlying business. The further the price of the stock is from the value of the underlying business, the more speculative forces are at play acting on its prices. Investing only on the basis of market momentum without being mindful of a stock's value could lead to massive losses. Secondly, stock price volatility may not always be reflecting a volatile business, while a volatile business would still translate into volatile stock prices.
  4. Index funds are sensible for most investors – Index funds make use of passive investment strategies that track indices representing portfolios of the most valued stocks of various market capitalizations tracking different sectors of the economy in a stock market. These funds, in a way, follow the economy as a whole and peg the growth of investors’ wealth to the overall economic development of the country. These funds are low cost and low-risk investment vehicles, and for investors who do not have the time or money to spend on active management, these provide steady low-risk value creation opportunities.
  5. Divided paying companies are good investment cases – Companies having a good history of dividends usually are the ones having strong businesses. These businesses have good cash earnings and strong revenue bases; their stocks not only provide high investment safety but also come with good long-term growth potential. Also, the rate of growth of a business could more often than not translate into an increase in dividend income, which over a period of time pays back a significant part of the original investment while the investor still holds on to the shares. Dividend reinvestment strategies offer even better value creation opportunity when an investor is able to accumulate more shares over his holding period at a nil extra cost.

The recent fiasco of Woodford Investment Management has brought to light the dangers of putting too much trust in celebrity fund managers. Neil Woodford’s disregard of regulations and his choice of novice companies with unclear business ideas in his portfolio sets him apart from the investment wisdom developed in the past hundred years across the Atlantic. The above investment wisdom is time tested and are especially beneficial for small investors. The ideas put more emphasis on the fundamental development of the businesses in the country rather than the speculative interests of individual fund managers.

The above-discussed ideas lead to one logical outcome; the role of speculators and arbitrageurs could progressively come down in the country’s capital markets. In the long run, investor funds are likely to have a closer connection to actual businesses where the country and the investors could be benefited equally.

It is also worth noting that BlackRock and State Street Global Advisors set shop in the United Kingdom in November 2019. Both these companies could try to implement their successful index-tracking investment strategies in the United Kingdom as well. Moreover, the country is likely to benefit from the corporate culture initiatives taken by these fund houses in corporate America. These companies with their strong voting presence in many of the large corporates in the United States have been able to instil positive corporate governance practices like increasing women participation in the boards of companies, reducing carbon footprint and supporting and funding critical social causes. These practices, should they come to the United Kingdom, will help the country to transition to a more robust corporate culture which, in the long run, will lead to a healthier and prosperous nation.

With Bank of England reducing the interest rates to a historic low level, the spotlight is back on diverse investment opportunities. 

Amidst this, are you getting worried about these falling interest rates and wondering where to put your money?

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