
Warren Buffett announced last month his retirement by 2026. What surprised me was not that Buffett was retiring but the lack of gravitas this piece of news had on the market. This is the icon of value investing that we are talking about here and such a development did not receive, in my view, enough reflection from the market. Understandably, the tributes will come later when he steps down.
Because of the low penetration rate of stock market investors in the Philippines, Buffett is unlikely to be known to many Filipinos.
To introduce this legend, the 94-year-old Buffett is the chairperson of Berkshire Hathaway, an investment company in the US. He is considered one of the most successful investors in the US and possibly the world.
Under the leadership of Buffett and his vice chair, Charlie Munger, Berkshire’s shares had a compounded return of 19.9 percent from 1965 to 2024. In other words, Buffett’s investments have delivered consistent returns for his fellow shareholders that have beaten the returns of the US stock market as proxied by the S&P 500.
While I am a fan of Buffett, I am a bigger fan of his mentor, Benjamin Graham. Buffett is the icon of value investing, but the founder of this style is Graham. Graham’s principles and teachings on finance have spawned a career path for many people in finance — the investment analyst. As a student of Graham, I consider Buffett the first investment analyst and a super analyst at that.
His imminent retirement makes me reflect on the future of investment analysis. While the methods have advanced thanks to research conducted by financial economists and scientists, the discipline and principles may be at risk of being forgotten, particularly in this era of memes and the power of social networks.
Buffett’s principles have been most helpful for me when analyzing companies. In this series, I discuss three principles that I consider core.
Firstly, while Graham was concerned about intrinsic value in his seeding contribution to investment analysis, Buffett added value creation and competitive advantage into the brew. In his 1983 letter to Berkshire shareholders, Buffett introduced his concept of economic goodwill as “businesses logically are worth far more than net tangible assets when they can be expected to produce earnings on such assets considerably in excess of market rates of return. The capitalized value of this excess return is economic Goodwill.”
To be consistent, I review a company’s return on equity (RoE) and its estimates of cost of capital. The RoE must be greater than the cost of capital for shareholder value creation and the build-up of economic goodwill. Marketers would consider this goodwill as being brand value and it partially is that.
As a concept, we look at how that brand has evolved under different inflationary environments.
Is the brand strong enough that the company can pass on price increases to its customers and be able to woo them back after the initial impact of price elasticity. If there is sufficient goodwill, an increase of 5 percent on his/her favorite beverage may make a customer cutback on purchases but will still include that item in the shopping cart. If there is immense goodwill, eventually he/she will return to the usual purchasing pattern. Deep value companies mean they have built enough economic goodwill to maintain the economics of their business, favorable or positive.
We see that analysis today in many sectors, such as property. High interest rates and a high inflationary environment in recent years make the cost of capital today very expensive. RoEs are under pressure and an oversupply in some market segments makes it difficult to increase prices and generate strong sales growth. In these times, searching for property companies that have enormous amounts of economic goodwill will allow value or long-term investors to take advantage of deep discounts in the market for this sector.
Next week I will discuss another Buffett investment principle — the creation of the economic moat. Moats are a defensive infrastructure that holds invaders at bay when the castles or forts are under siege. Many Philippine companies have very enduring moats as I will discuss next week.