Lessons from Warren Buffett’s letter for Australian investors

While the end of February marks a sigh of relief for Aussie investors as another reporting season comes to an end, it also marks an exciting period for value investors with the release of Warren Buffett’s annual letter to the shareholders of Berkshire Hathaway Inc. This year’s letter is once again a great read. Here we dissect some comments by Buffett and how they could be tailored to the domestic market.

During 2013 Buffett made two major investments – NV Energy and H.J Heinz

While comparing a company Buffett has bought with its local “equivalent” can be fraught with danger, the theme of owning “indestructible” businesses that are essential is an increasingly important focus for Berkshire Hathaway. Buffett has always talked about how people and corporations will always need insurance, but this has now spread to other essentials such as electricity, rail freight and food.

Locally listed major players such as AGL Energy Ltd (ASX: AGK), Origin Energy Limited (ASX: ORG) and Goodman Fielder Ltd (ASX: GFF) are three firms which stand out on the ASX as domestic equivalents.

Focus on earnings per share

Buffett emphasised in his letter this year that his goal at Berkshire Hathaway is “not simply growing, but rather increasing pre-share results.” It is important to remember that as shareholders what matters is growth in per share earnings, and to guard against some management teams who will try and ‘pull the wool over investors’ eyes’ and paint results in a prettier light by focusing on metrics such as earnings before interest, tax, depreciation and amortisation (EBITDA). There are plenty of promotional managers of companies on the ASX and Buffett’s warning is worth heeding.

The US economy is healing and is a great long-term bet

Buffett noted that the decision to purchase rail freight company BNSF during the GFC was “a bet on ever-rising US prosperity to be very close to a sure thing.” With this statement in mind, Aussie investors can act in two ways. Firstly, there are also many reasons to be positive about the long-term economic future of Australia. Rail freight businesses such as Asciano Ltd (ASX: AIO) and Aurizon Holdings Ltd (ASX: AZJ) could be sensible ways to gain exposure to Australia’s long-term growth potential. Secondly, local stocks with exposure to the US economy such as James Hardie Industries plc (ASX: JHX) and ResMed Inc (ASX: RMD) have the potential to gain from “ever-rising US prosperity.”

Foolish takeaway

Buffett’s long-term track record of approximately 20% per annum investment returns is a tough act to follow, however emulating his style and thinking can provide investors with respectable returns too.

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Motley Fool contributor Tim McArthur owns shares in Origin Energy Ltd and Goodman Fielder Ltd.

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