With the recent news of his investment in Tesco (LON:TSCO), we thought we'd take a look this week at a Warren Buffett stock screen using the Stockopedia Premium data-set. Buffett's approach is a highly fundamentals-focused one which blends both Graham-esque value investing principles with an emphasis on the calibre of the business franchise. In essence, it looks for simple, understandable companies that have a monopoly position and pricing power (for example, through strong brand recognition), so as to ensure consistent profits and a good return on equity, but where there is significant unrecognized value.  

Background

Referred to as the "Sage of Omaha", Warren Buffett is arguably the most successful living investor, delivering consistently market-beating profits for investors in his Berkshire Hathaway group. Buffett studied under Benjamin Graham at the Columbia Graduate Business School. At the age of 25 in 1956, Buffett started an investment partnership which delivered a compound return over the next 13 years of 29.5%. In 1965, Buffett closed the partnership and used his capital to purchase a controlling interest in Berkshire Cotton Manufacturing, a well established but struggling textile company. This company merged with Hathaway Manufacturing, and also bought interests in two insurance companies in 1967. The combined company was renamed Berkshire Hathaway. Over the last 44 years, this investment vehicle has averaged an astonishing 20.3% annual growth in book value!

Investment Strategy

Although he has not written a book, Warren Buffett has laid out his investment philosophy in numerous Berkshire Hathaway shareholder letters, as well as speeches and interviews over the years (see below). The following summary is based on the analysis of Buffett provided by Robert Hagstrom in his excellent book “The Essential Buffett: Timeless Principles for the New Economy”. Hagstrom argues that Warren Buffet’s investment methodology is a hybrid mix of the strategies put forward by two 1930s style investment advisers, Ben Graham and Philip Fisher. Indeed, Buffett himself has indicated that "I'm 15 percent Fisher and 85 percent Benjamin Graham", although Hagstrom notes that this was in 1990 and that Buffet has probably moved closely towards Fisher since then:

"From Graham, Buffett learned the margin of safety approach - that is, use strict quantative guidelines to buy shares in companies that are selling for less than their net working capital... From Fisher, Buffett…

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