This year is off to a rocky start, even for billionaires. Global markets have remained volatile with fluctuations driven by inflation and lockdowns. These have caused the top 10 billionaires in the world to lose wealth in January. Well, all except Berkshire Hathaway CEO Warren Buffett.
According to the Bloomberg Billionaires Index, Elon Musk, Jeff Bezos, Larry Page, Sergey Brin, and Mark Zuckerberg have collectively lost over $120bn in January. Out of the nine richest individuals in the world, only Buffett’s net worth has increased so far in 2022, and by $2.4bn.
The most popular investor in the world has remained a stock market success for over six decades. And along the way, he has left us with nuggets of investing wisdom that I try and use to build my portfolio. Here are two UK shares on my watchlist that I think Warren Buffett would approve of.
Warren Buffett’s hunt for value stocks
“Price is what you pay; value is what you get”. I think This Warren Buffett quote from 2008 is a lesson every new investor should take on. This rings true in the age of crypto where every new coin attracts a horde of what I like to call crypto zombies. Ignoring the fundamentals and future potential of a company and simply jumping on a bandwagon usually ends badly.
Let me explain this with an example. The electric vehicle (EV) boom since the COP26 summit is common knowledge. And Elon Musk’s Tesla (NASDAQ: TSLA) is the big driver behind this market. In late 2021, I thought an investment in Tesla stock was a no-brainer. The company always had a huge order book and has managed to constantly wow customers and remain in the public eye.
But when I peeked under the Tesla curtain, I noticed several issues preventing expansion, including procuring raw materials and regulations. And then there’s the incredibly inflated valuation of the Tesla stock in December, when it was trading at a price-to-earnings (P/E) ratio of over 200 times.
Had I purchased Tesla stock in December, my investment would be down nearly 20% today. Although it is plausible that Tesla stock will grow well over the next decade or so, I think the downside outweighed the value that the company offered in December.
However, I see many value investments for my portfolio right now and Bloomsbury Publishing (LSE: BMY) stands out. Its latest trading update showed that group pre-tax revenue is on track to exceed previous guidelines. Figures show that the publisher is on track to finish 24% above the previous profit estimations. This also puts the company on track to raise yield to over 2.5% in the next two years.
There are risks to consider as well, like rising competition from other publishers and the changing landscape of storytelling. The visual medium is far more popular than the written word and it is bound to eat into the market slowly but surely. But I think Warren Buffett would approve of the value it offers as an investment and I am definitely considering it over several trending stocks right now.
Using cash in hand
Warren Buffett is a lot more than just a value investor. His company, Berkshire Hathaway, also looks at prudent factors like how a company reuses the revenue it generates. And it is not all about dividends or share buybacks either.
Buffett believes that acquisitions are a great way for a company to grow its ‘moat.’ And Buffett describes a business moat as assets that a company can fall back on in testing times. This includes patents, intellectual property, trademarks, and brand recognition. By acquiring smaller businesses, companies can eliminate competition, gain access to restricted resources, and grow faster.
An example of such a buy from Warren Buffett is the US$1bn investment in Amazon (NASDAQ:AMZN) in 2019. At the time, the e-commerce giant was trading at a P/E ratio of 60, which points to an overvalued stock. A big no-no for the Oracle from Omaha. But what impressed Buffett was Amazon’s aggressive expansion through acquisition strategy. The company managed to turn revenue from the razor-thin margins of the e-commerce business into a media empire by purchasing distribution rights to major productions.
Buffett bought Amazon stock at $1,850. It is currently trading at $3,158, up 70% since 2019. Although I wouldn’t invest in Amazon stock today, there are some UK companies that reinvest cleverly. One company that stands out is Diageo (LSE:DGE). With a huge cash reserve of over £1.6bn, the interim report shows how the company has grown its sales and revenue figures steadily by amassing a large number of popular alcohol brands. The company also recently acquired Casa UM, a premium artisanal mezcal brand, to grow regional alcohol offerings as well.
And despite growing regulations with overseas alcohol trade and increasingly health-conscious youth, I think Diageo has a strong hold on the alcohol market for the foreseeable future. The large portfolio of brands, international presence, and robust financials means this is a must-have value stock for my portfolio today.
Invest in what you know, but do not overdo it
This old Buffett adage is well-known investing advice. But I don’t see a lot of my young investor friends really following this. As a tech reporter and gaming enthusiast, I follow the sector a lot. And this puts me in an optimal space to invest in UK’s booming gaming market today. But this does not mean I invest in every promising UK gaming venture. In fact, Warren Buffett is big on holding onto excess savings and picking the right stock at the right time.
The gaming market is huge and just broke the $300bn barrier. The metaverse expansion and the sudden expansion in the potential of the industry is very uplifting. But the sector is still recovering from unchecked progress during the pandemic. Inflated valuations have left most UK gaming stocks bloodshot in the last six months. And despite my bullish stance on the industry and the growing involvement of UK gaming studios in global projects, I think the wise thing for me to do here is to watch UK gaming companies closely over the next few months and invest when the whispers of recovery grow louder.
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Suraj Radhakrishnan has no position in any of the shares mentioned. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK has recommended Amazon, Bloomsbury Publishing, Diageo, and Tesla. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
