Why following the Warren Buffett method might be easier than you think

Warren Buffett’s investing strategy has been reverse-engineered to death. Made-up metrics, screens, discount rates, 40-tab valuation models — all built on the assumption that somewhere inside Berkshire Hathaway there’s a formula worth copying. 

There isn’t. And Buffett’s actual approach is considerably less work than the imitations.

The overriding principle

Buffett’s basic aim is to buy quality businesses below what he calls intrinsic value. That much is generally agreed.

What’s less appreciated is how little calculation goes into this. At the 2009 Berkshire Hathaway meeting looking at how he runs the numbers, Buffett said the following: “If you need to use a computer or a calculator to make the calculation, you shouldn’t buy it.”

Anything that isn’t immediately obvious – that doesn’t scream at you – goes in the too-hard pile. And that pile should be enormous for most investors.

This isn’t laziness — it’s an admission that a valuation requiring three decimal places can be wrong in three decimal places. That means a lot of guesswork, and guesswork creates risk.

Importantly though, “obvious” is subjective – and not in the way people mistakenly use it. What’s obvious to one person might genuinely not be obvious to another.

I’m not in a position to assess a stock like Floor & Decor from 3,500 miles away. But the reverse might be true for Buffett when it comes to the UK property market.

An example close to home

Regional REIT (LSE:RGL) owns offices outside the M25. The red flags are immediate: vacancy rates around 25%, a recent dividend cut, and a sector most institutions stopped covering during Covid-19.

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Those are real reasons for caution. But there’s a part of the equation that doesn’t need a calculator. 

Management splits the £543m portfolio into four buckets. The Core bucket — 87% occupied, the stuff that actually works — is valued at £348.5m. 

Compared to that, the firm’s market cap plus net debt comes to roughly £368m. That means the high-quality assets cover almost the entire enterprise value by themselves.

The other £195m — Capex to Core, Value Add and the assets earmarked for sale aren’t so attractive. But at today’s prices, I see them as essentially free.

Two further details are important. One is that a 3.4% cost of debt is cheap money that the company can’t easily replace – and that’s worth noting.

Regional REIT also achieved £41m of disposals earlier this year. And the proceeds are set to go towards strengthening the balance sheet.

That might make things even more attractive. But to my eye, the value proposition screams at me even without the additional boost.

Worth a look?

Buffett’s method isn’t about complexity. It’s about finding things you’re positioned to understand better than the person on the other side of the trade.

For UK investors, that might be unglamorous property in cities the market has written off, especially with Andy Burnham’s devolution plans. 

Nobody’s building a model for that in Omaha. But it’s an opportunity that I think is worth considering.

Regional REIT has genuine challenges. But a 95p share price seems to already assume they get worse.

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Stephen Wright owns shares in Berkshire Hathaway.