Hargreaves Lansdown

Invest your ISA like Warren Buffett

| 21 March 2014

Invest your ISA like Warren Buffett

Warren Buffett is probably the world's most famous investor, and currently the 4th richest man in the world, with an estimated fortune of $58.2bn.

You might think that to use his investment strategies, you would require a significant amount of capital, but anyone can apply Warren Buffett's principles and hopefully grow their wealth over the long term.

Why not start with this year's ISA? Below we look at four ways you could invest like Warren Buffett.

1. "Our favourite holding period is forever."

This is one of Warren Buffett's most famous quotes. He says that if you wouldn't feel comfortable owning a company's shares for ten years, you shouldn't own them for ten minutes. This has led Buffett towards companies he labels as "inevitables" - those with extraordinary longevity and dominant market positions that can allow them to generate attractive returns for shareholders year after year.

Unilever - dividend growth
over 25 years
 Dividend per share (p)Growth on previous year
201389.215.4%
201277.30.9%
201176.68.6%
201070.59.5%
200964.417.8%
200854.711.5%
200749.07.3%
200645.75.0%
200543.57.3%
200440.67.4%
200337.812.5%
200233.613.4%
200129.62.7%
200028.811.0%
199926.036.3%
199819.04.0%
199718.31.0%
199618.119.3%
199515.27.4%
199414.114.6%
199312.316.2%
199210.64.3%
199110.27.2%
19909.522.0%
19897.8n/a

One company which fits the bill is consumer goods giant Unilever. Its products, which include some of the world's best-known brands such as PG Tips, Persil, Dove and Knorr, are sold in 190 countries. Each day 2 billion consumers worldwide use a Unilever product.

With this market dominance has come considerable profit. In 1989 Unilever's annual dividend was 7.8p per share - today it is 89.2p, an average increase of 10.6% per annum. Naturally this has propelled the share price, up more than seven-fold over the period - though past performance is not a guide to future returns.

Today the shares offer a starting yield of 3.9%, and as we have seen the dividend has the potential to grow, though this is not guaranteed - it also has the potential to fall.

An investment in Unilever is not without risk - like any business, it faces challenges. Much of Unilever's sales growth in recent years has come from higher-risk emerging markets - consumer demand in these economies has come under pressure recently, and this is expected to continue in 2014. Furthermore, though Unilever has an enviable market position because of the strength of its brands, competition is likely to intensify, especially as more companies focus on the aforementioned emerging markets. As with any investment, its shares can fall as well as rise and you could get back less than you invest.

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2. "Price is what you pay; value is what you get."

The distinction between price and value is essential for investors. Share prices often deviate from the intrinsic value of a business, as investors are too optimistic or pessimistic. History has shown that buying when valuations are cheap can stack the odds in your favour and give you a greater chance of profit. There are a number of ways of measuring value - we carry out detailed statistical analysis in order to identify which markets and sectors currently look undervalued.

Our analysis currently suggests that the Japanese stock market represents exceptional value. Over the past few years we have been getting increasingly excited about its prospects. After almost two decades in the doldrums, during which many investors lost money, Japan was out of fashion and off most investors' radars. A catalyst was needed to unlock the value in Japanese shares, and this has arrived with new Prime Minister, Shinzo Abe's radical policies which aim to end Japan's economic stagnation.

For investors looking to take advantage of cheap valuations in Japan, we suggest looking at the GLG Japan CoreAlpha Fund, managed by Stephen Harker and his team. According to our research he has one of the best records of stock selection in the sector. He believes financial firms are especially cheap at present. Elsewhere, he also holds electrical appliance companies such as Panasonic and Nintendo, believing their long-term prospects to be encouraging. The portfolio is concentrated, which means each holding can make a real difference to performance, though it also increases risk. It can also use derivatives to enhance returns.

The manager's contrarian strategy has stood the fund in good stead over the longer term, although past performance is no guarantee of future returns. For adventurous investors seeking exposure to one of the most undervalued global markets, we believe this fund is an excellent choice for this year's ISA.

Find out more about GLG Japan CoreAlpha, its risks, and how to invest

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3. "The best thing that happens to us is when a great company gets into temporary trouble...We want to buy them when they're on the operating table."

Warren Buffett likes to buy quality businesses which have fallen on hard times. An example was his $5bn investment in Bank of America in the aftermath of the financial crisis. Buffett rarely invests outside his home US market, but in 2012 he made an extremely large investment in UK retailer Tesco following a profits warning and a corresponding fall in the share price. The warning revealed that Tesco's previously relentless growth would come to a shuddering halt, as it had lost market share to key rivals, and pre-Christmas promotional campaigns had failed to generate sales.

On the day the news broke, the company's shares plummeted 16%. Buffett saw an opportunity and bought in, taking a huge stake of 5.2% of the entire business.

Those expecting a quick turnaround have been disappointed, however. Results have continued to disappoint, and the share price has failed to make any progress since. Indeed Warren Buffett himself has recently trimmed his stake, though he still owns 3.7% of Tesco (worth £1.67bn at the end of last year).

Tesco will unveil its annual results next month, and this should shed some light on how the company's turnaround is progressing. An improved store experience, with more staff, better service, and more fresh food lines were at the heart of the plan. At the time of writing the market consensus of the shares is no more than a 'hold'.

It is to be expected that it will take a while to implement strategic change in a business as big as Tesco. Only time will tell whether Warren Buffett's initial investment will pay off.

Tesco prices, charts and research
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4. "Locking into that observed propensity for wonderful businesses to compound wealth for their owners is at the heart of our approach."

The above quote isn't from Warren Buffett - it's from Nick Train, a UK fund manager who has a proven track record of putting Warren Buffett's principles into action. His Lindsell Train Global Equity Fund is based on Buffett's straightforward strategy of buying the undervalued shares of great companies and holding them forever. He and co-manager Michael Lindsell invest in what they regard as exceptional companies, with leading brands, which can increase their profits and cash-flows well into the future. The fund is concentrated at just 25-30 holdings, and maintains extremely low levels of turnover.

One of the fund's core holdings is the aforementioned Unilever, which represents around 7% of the portfolio. Nick Train agrees with us that many Japanese firms look outstanding value at present, and approximately 30% is invested in Japan at present, including holdings in Nintendo and Japan Exchange Group.

The fund's concentrated nature increases risk, and like all investments it will fall as well as rise in value, so you could get back less than you invest. Nick Train is one of the best stock pickers we know, and we believe the fund represents a superb choice for this year's ISA.

Find out more about Lindsell Train Global Equity, its risks, and how to invest

It takes less than five minutes to start your ISA

All you need is your debit card and National Insurance number. If you're not already familiar with our current Terms & Conditions and Key Features, and the Key Investor Information Documents for any funds you are considering.

Then, simply follow the on-screen instructions. It really is that easy, so why not make it the next thing you do today?

If you have any questions about ISAs please do not hesitate to call us on 0117 900 9000, alternatively you can email us.

The value of investments can go down in value as well as up, so you could get back less than you invest. It is therefore important that you understand the risks and commitments. This website is not personal advice based on your circumstances. So you can make informed decisions for yourself we aim to provide you with the best information, best service and best prices. If you are unsure about the suitability of an investment please contact us for advice.


Looking to invest tax efficiently?

The Vantage Stocks & Shares ISA gives you the choice to invest in over 2,200 discounted funds.

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Vantage ISA

  • Everyone over 18 can invest up to £15,000 this tax year.
  • No capital gains tax and no further income tax.
  • Remember tax rules can change over time, and the value of benefits will depend on your circumstances.
  • You choose your own investments.
  • Wide investment choice including funds, shares and cash.
  • Save up to 5.5% on funds or deal shares from £5.95 per deal online.
  • Manage your ISA online, by phone or post.
  • You can withdraw your capital at any time, although investments should be held for the long term.
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