Most people would say Warren Buffett is the world’s greatest investor. I doubt he’d buy National Australia Bank Ltd. (ASX: NAB) shares today.
The Buffett Munger Formula
In an interview with the BBC back in 2009 — when financial markets were crashing in the wake of the global financial crisis (GFC) — Buffett’s investing partner Charlie Munger revealed a surprisingly simple set of rules they use to pick investments for their $US 430 billion company, Berkshire Hathaway.
Let’s run the four-part checklist over NAB shares to get a sense if they would buy in today:
1. Buy businesses you are capable of understanding. Buffett and Munger believe there is no point buying shares in a business you don’t understand. Don’t know what product it sells? Don’t buy it. Can’t explain the strategy? Don’t buy it.
Given Buffett’s history of investing in bank shares, I think he could understand NAB’s operations quite easily.
2. A durable competitive advantage is a must-have. A ‘competitive advantage’ is something that makes a business able to withstand competition and grow stronger. It may be the company’s brand, product or a barrier that protects its products from becoming just like every other in the market. For example, Buffett owns Coca-Cola Company shares, has a large stake in Kraft Heinz and almost $US 7 billion in Apple Inc. He also owns shares of banks, like Wells Fargo.
I think NAB has a competitive advantage, with a leading position in business banking and a decent chunk of the mortgage market. I don’t know if its advantage is ‘durable’ but I think it has an advantage that will help it continue to turn out profits.
3. Company management must have integrity and talent. It’s pretty easy to understand why you would want a CEO and board to show these two traits. You don’t want your business run by tyrants.
The CEO of NAB is Andrew Thorburn, an experienced banker and the current Chairman of the Australian Bankers’ Association. I think he passes the test. The board is led by Kenneth Henry AC.
4. No company is worth an infinite price. Obviously, no matter how good a company looks, you still need to pay a decent price for shares – to maximise your return. Buffett and Munger have a knack for waiting for what seems to be — after the fact — a really good time and price to buy. For example, during the GFC, Buffett bought options in US investment bank Goldman Sachs.
At the time, Lehman Brothers — the fourth biggest investment bank in the world — had just gone bust. So when he made the $US 5 billion Goldman deal, some people thought he was a little bit crazy. But just four years later Buffett had made $US 3.1 billion (a 60% return), from dividends and shares.
As Buffett said in his most recent letter to shareholders: “Every decade or so, dark clouds will fill the economic skies, and they will briefly rain gold. When downpours of that sort occur, it’s imperative that we rush outdoors carrying washtubs, not teaspoons. And that we will do.”
Given the 20% rally in NAB shares over the past year, I doubt Buffett is outside waiting for NAB shares to rain into his bucket. My guess is he’d want a lower price before buying in.
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The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Apple and Berkshire Hathaway (B shares) and has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
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