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Posted on: 13 October 2015

A well-thumbed copy of 'The Essays of Warren Buffett' sits in Duncan Lawrie's investment research department, and with 2015 marking 50 years since Buffett took control of Berkshire Hathaway, we thought it would be interesting to share a little of our learning from one of the best known and most successful investors of current times - and how we try to apply his wisdom when investing on behalf of our clients.

Firstly, Buffett's investment style is disarmingly simple: buy 'wonderful' quality companies for less than he believes they are worth, ideally those which operate in fairly stable industries and can demonstrate a hard-to-replicate advantage over their competitors - known as an 'economic moat'. And then never sell them.

While many investors distinguish between 'value' investing (buying companies cheaply) and 'growth' investing (buying companies which will grow faster than the average, hoping that superior earnings growth will result in market-beating performance), Buffett believes "[Value and Growth] are integrally linked since growth must be treated as a component of value"1. So the first lesson we take from Buffett is not to get hung up on distinguishing between these two types of investing.

Secondly, Buffett focuses on businesses that can fund their expansion with little additional capital, and thirdly, he only invests in businesses he (or his team) can understand. Over 50 years, Berkshire Hathaway has bought Gillette, See's Candy and GEICO Insurance because each meets his investment criteria in their own way. They all have strong brands, consistent returns on investment and strong management teams. He also pays great attention to the price paid for these investments, as valuation is an important part of successful investing.

Management is an essential aspect of Buffett's investment framework: Berkshire Hathaway gives its underlying companies significant autonomy over their operations and puts a great deal of trust in management. This has led to very stable teams at Berkshire-owned firms and allowed them to take a genuinely long-term view when shaping their businesses, knowing Berkshire has - assuming things go well - an indefinite investment time horizon2. This is essential for successful investing - and something we advocate.

Buffett is likely to step down from running Berkshire Hathaway in the coming years, and discussed successful planning in his latest letter to shareholders. As he starts to hand over the reins to the next generation, we are reminded how important it is to have a well-defined and consistent investment philosophy. While it is not yet clear if the next generation of investors at Berkshire Hathaway will come close to matching Buffett's enviable track record, they will certainly have his investment criteria deeply ingrained in all they do.

Lessons can also be learned from his diligent and thoughtful approach to succession planning: be clear and start planning early, which applies equally to a multi-billion dollar business or passing on family assets.

While we can't say we never sell our investments, many of Buffett's key lessons can be found in Duncan Lawrie's approach to investing. Overall, we take a long-term view, always looking for investments that can provide progressive and sustainable growth over a long period of time.

In recommending diverse risk-adjusted portfolios built from investment opportunities that we have thoroughly researched, impartially and objectively, we consider the macro-economic climate, as well as the industry, geography and trading performance of a specific company and/or track record of a fund. We also consider different asset classes, such as equities, bonds and alternative asset classes, and the different benefits each can bring to your portfolio - and we will only invest in what we understand.

If you would like more information about our wealth management services, please contact Seth Cowburn, Head of Wealth Management on 0207 201 3070 or email scowburn@duncanlawrie.com.

We've collated some of Warren Buffett's most memorable quotes below:

1982, on buying wonderful companies at reasonable prices, not reasonable companies at wonderful prices:

"We have tried occasionally to buy toads at bargain prices with results that have been chronicled in past reports. Clearly our kisses fell flat. We have done well with a couple of princes - but they were princes when purchased."3

1986, on boards and management:

"The management failings that Charlie [Munger, Vice-Chairman] and I have seen make us thankful that we are linked with the managers of our three permanent holdings. They love their businesses, they think like owners, and they exude integrity and ability."4

1997, on intelligent investing:

"Intelligent investing is not complex, though that is far from saying it is easy. What an investor needs is the ability to correctly evaluate selected businesses. Note that word 'selected': You don't have to be an expert on every company, or even many. You only have to be able to evaluate companies within your circle of competence. The size of that circle is not very important; knowing its boundaries, however, is vital."5

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All data has been compiled by Duncan Lawrie from sources believed to be reliable. Full details of sources are available on request.
The comments and figures in this document are generally applicable but you should always take specific advice  to suit your individual circumstances before taking any action. Errors and omissions excepted.
The value of investments and income generated may fall as well as rise, and investors may not get back the  amount invested. Past performance is not a reliable indicator of future results.

[1]  The Essays of Warren Buffett, p.13

[2]  The Essays of Warren Buffett, p.84

[3]  The Essays of Warren Buffett, p.210

[4]  The Essays of Warren Buffett, p.44

[5]  The Essays of Warren Buffett, p.116