Would Buffett Buy These AIM-Listed Moats?

Published in Investing on 20 July 2012

Among AIM's very largest shares, these companies have very distinctive business models.

You don't need me to tell you that Warren Buffett is one of the world's most widely quoted investors. And few of us haven't come across one of Buffett's most popular quotes: "Rule number 1: don't lose money. Rule number 2: don't forget rule number one."

It's a quote that's usually trotted out to highlight Buffett's investing performance. For while Berkshire Hathaway does lose money, it does it only very rarely. Between 1965 and 2006, for instance, Buffett experienced only one loss-making year: 2001 -- pretty good going for a 40+ year performance.

What is less well appreciated, though, is why Buffett is so keen to avoid losses. In short, it's not because he hates red ink -- it's because he understands all too well the impact of incremental losses on overall investing performance.

The Snowball

Here on The Fool, we've always been keen on the notion of compounding. In short, slow, steady, consistent returns build up over time to a hefty gain. It's why we're such fans of index trackers, for instance -- and of low-cost index trackers in particular.

Warren Buffett has much the same view of things. According to Buffett's official biographer Alice Schroeder, it's actually why her biography was entitled The Snowball. Snowballing, she explains, "is really a metaphor for compounding, for the way that things tend to grow at an exponential rate when they are rolling forward over time".

And a loss -- even a small one -- is a bit like that snowball hitting a bump that slows it down. And we don't want that.

Because Buffett understands all too well that it's difficult to recover from losses. If your portfolio goes down by 50%, from that point it will then take a 100% percent return just to get back to where you were.

Safer bets

Which, in simple terms, is why Buffett likes big businesses: they're less volatile, and less likely to go pop. In Buffett's book, the investor should go for businesses that deliver outstanding returns on capital, which produce substantial cash profits, and which possess a huge economic 'moat' to protect them from competitors.

It's why, for instance, he bought railroad company Burlington Northern Santa Fe Corp -- yes, all of it, at a price tag of $34 billion.

In short, Buffett buys great businesses, businesses that throw off substantial amounts of cash, and that happen -- ideally -- to be priced very attractively at the time of purchase.

But AIM-listed businesses don't often fit that description. They might be great businesses tomorrow -- but they're not necessarily great businesses today. And what they're most obviously lacking is size.

Finding tomorrow's great businesses

That said, take a look at AIM, and it's not difficult to spot businesses that meet other Buffett criteria; one being 'moat', for instance, which is Buffett's term for a business's long-term sustainable competitive advantage.

Setting a up a brand new competitor to Burlington Northern Santa Fe Corp, for instance, is going to be a pretty costly business. Likewise Coca-Cola (NYSE: KO.US). Not to mention IBM (NYSE: IBM.US), Procter & Gamble (NYSE: PG.US) and Kraft Foods (NYSE: KFT.US) -- each of them also top 10 Buffett holdings.

But such businesses didn't arrive at their present sizes overnight. A beaten-down British business that Buffett is currently loading up on, for instance, was founded in 1919 -- although these days it's the 16th-largest company in the FTSE 100 (UKX).

Its name? This and more is revealed in our free special report -- "The One UK Share That Warren Buffett Loves" -- which can be in your inbox in seconds. As I say, it's free, and without obligation, so what have you got to lose?

Boring but beautiful

So does London's AIM market possess any Buffett-style shares that simply lack Buffet-style size today -- but which might grow over time? I thought I'd see.

Sure enough, five very interesting-looking business can be found among the 20 largest shares on AIM, each with a definite and undoubted moat. Unexciting they may be -- but heck, so is selling sugared water, processed cheese and cleaning liquids.

CompanyMarket capBusiness
ASOS (LSE: ASC)£1.4bnOnline retailing
James Halstead (LSE: JHD)£568mFlooring
Mulberry Group (LSE: MUL)£862mUpmarket fashion
Monitise (LSE: MONI)£301mMobile payments
Majestic Wine (LSE: MJW)£292mWine retailing

Nor are these necessarily tiny minnows: the largest business listed on AIM right now, Gulf Keystone Petroleum (LSE: GKP), boasts a market capitalisation north of £2 billion, and all five picks are reasonably-sized.

Want to know more? They've all been covered here on the Fool before, so click on the ticker to pull up Foolish comment and analysis.

Are you looking to profit from this uncertain economy? "10 Steps To Making A Million In The Market" is the very latest Motley Fool guide to help Britain invest. Better. We urge you to read the report today -- it's free.

More investing ideas from Malcolm Wheatley:

> Malcolm doesn't hold shares in any of the companies mentioned.

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Comments

The opinions expressed here are those of the individual writers and are not representative of The Motley Fool. If you spot any comments that are unsuitable hit the flag to alert our moderators.

cornytiv34 20 Jul 2012 , 7:16pm

Trying to link every share to Buffett. If I was Buffet I would sue you for deformation of character.

theRealGrinch 20 Jul 2012 , 7:54pm

sorry, but Im yawning my head off

ANuvver 20 Jul 2012 , 8:35pm

At least The Buffety Neil are now putting the names of their page-3 stunners in the headlines...

MDW1954 20 Jul 2012 , 9:16pm

This is a 764-word article, and you're complaining about 42 of them?

Malcolm (author)

ANuvver 20 Jul 2012 , 9:18pm

Pareto effect, probably...

MDW1954 20 Jul 2012 , 9:35pm

Any thoughts on the shares?

Malcolm (author)

mrburns2050 20 Jul 2012 , 10:25pm

Its only my view but I would not and don't think Buffet would go for the fickle fashion business with next to no Divs and crazy valuations.

Don't think he would buy into Monitise. Only buys what he understands with a "moat". I think although phone banking is and will be massive think there will be a lot of players in the field. And no one has really established a definitive lead (i might stand to be corrected).

Cheers

MDW1954 20 Jul 2012 , 10:38pm

Interesting, MrBurns2050. Yet after years of saying "no" to technology, he's just placed a huge bet on IBM. And Mulberry as "fickle"? I was working there as a management consultant 20+ years ago. I should have bought shares then! Ditto ASOS. I'd never buy from them, but there's no denying that lots of people do.

Malcolm (author)

alarmbells 21 Jul 2012 , 9:18am

MONI of definite interest. A good article spoiled by the Buffetology - Buffet wouldn't buy anything on AIM

duffmanchon 21 Jul 2012 , 11:05am

MONI don't seem to make any money?! Their revenue is growing strongly but EPS is negative, so is ROE. Revenue is vanity, profit is sanity...

mrburns2050 21 Jul 2012 , 11:24am

A lass at work 2 years ago. Who i kept doing her head on about sharers and trying to explain the markets to said. buy this "bag" company i would love to own a bag from them and all the celebrates are. Think they were rising from 8 to10 back then.

I did not. With hind sight i should have. Hind sight is a wonderful thing though.

Still think at 33x its a massive gamble on Asian markets. and sustaining this growth. It has one product range and i believe fashion consumers are fickle over the long term. Then again i don't follow fashion!

Monitise has (Currently) no profit.
IBM profit 21,003.00 million and a fair P/E plus divs

That's why I think Buffet is buying in. Has given the industry 20 or more so years to see who the big players are and who has the widest and deepest moat.

Cheers

bythefates 21 Jul 2012 , 8:09pm

Buffet could buy monitise couldn't he perhaps he'd like to own it instead? Afterall just owning shares can be quite boring i imagine :)

bythefates 21 Jul 2012 , 8:27pm

You also have to remember buffett has just bought his first technology shares (ibm) so i think if he made choices he would be looking for more of a service type buy or failing that go for majestic as a wine grower with a longevity Mkt cap 290.49M, P/E 17.50
wait till its a bit lower bargain ....

Wuffle 22 Jul 2012 , 6:42am

Malcolm,
Not really my area but I think IBM control a lot of the market for servers and the like.
Given the integral nature of this to the modern global economy, are IBM a utility?
'Technology company' implies so much about short term, easily superseded product.

Wuffle.

Wuffle 22 Jul 2012 , 6:44am

Also,
Similar experience with girlfriend / handbag that could have sorted my retirement. Never mind.

Wuffle.

MDW1954 22 Jul 2012 , 11:50am

Hello Wuffle (and mrburns2050)

Similar experience with girlfriend / handbag that could have sorted my retirement. Never mind.

Peter Lynch, you'll recall, sought his wife's opinion on emerging trends and hot companies, spotting them well before the rest of Wall Street.

Sadly, it hasn't worked yet with mine!

Malcolm (author)

bythefates 30 Aug 2012 , 7:21pm

Monitise filly! filly!

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