My two favourite Buffett rules are:
- Only invest in companies with a sustainable competitive advantage, and
- Know your company and its value, and only invest when you have a margin of safety
I often find that people I speak with have trouble relating to Buffett. He’s been investing for so long and is worth so much money that his achievements are outside the mental limits of most normal people, so I set out to find how his investing philosophy and success can be demonstrated to new investors.
Market Vectors Wide Moat ETF
Already available in Australia is the exchange traded fund that tracks an index of the 20 cheapest Buffet-worthy stocks listed on the US sharemarket- just look for the ticker MOAT in your favourite broker website. The ETF includes the likes of Harley Davidson, Google, Twenty-First Century Fox, American Express, and Hersheys.
The companies in the list all satisfy the two rules above; they all have sustainable competitive advantages over their peers (sometimes referred to as a moat) and have been bought at cheap prices based on the investing rules of the ETF.
The performance of the ETF speaks for itself. Since it commenced trading in mid-2012, $10,000 invested in the Wide Moat ETF would now be worth $15,020, versus just $13,568 for the S&P 500, a 15% difference!
Wide Moat Australian Stocks
The same index can, and I’m sure will be, created for Australian stocks in time, but for now investors need look no further than some of Australia’s best companies for the types of stocks that fit the Buffett mould. Here are three:
Carsales.Com Ltd (ASX: CAR) operates the dominant car advertisement website in Australia. It is the go-to destination for car buyers and sellers, with its lead over the competition seemly improving each and every year. Carsales also looks like good value at present with meaningful upside to come from the group’s expansion into Asia and South America starting to gain some traction.
It could be argued that Brambles Limited (ASX: BXB) looks slightly more expensive than Carsales at the moment, but great companies rarely look cheap. The transport and logistics company operates a shipping network of unrivalled size, providing services to many of the largest corporations in the world. The company continues to win new contracts, which further increases its advantage over peers.
Veda Group Ltd (ASX: VED) operates a near-monopoly on credit reporting in Australia. Credit reporting is required for any type of significant loan in Australia and the housing boom has to be helping demand for Veda’s product. Over the medium term, Veda stands to benefit from more refinanced loans at lower interest rates and probably an increase in subscription revenue as more companies spring up to take advantage of the lowest interest rates in 50 years.