INVESTING IDEAS: How to invest like Warren Buffett - and the tool that checks you are doing it right

By Simon Lambert

The world's greatest investor: Warren Buffett has built up a huge fortune with his astute investing, Stockopedia analyses his style and lets investors see what shares he would buy

The search for the secret of investing success has delivered more than its fair share of fascinating, complicated and sometimes bizarre ideas.

But if there is one thing that shines through that murky soup, it is that having a plan is a good idea.

Working out some rules and sticking to them is the common factor that joins the dots between the famous investing names, from Warren Buffett to Ben Graham, Jim Slater and Neil Woodford.

The problem for the modern-day personal investor though is that it’s one thing to say you plan on investing like Warren Buffett, but it’s another thing altogether to have the time to sit down, pick your shares accordingly and then continue to manage that portfolio.

Interestingly, for those who prefer to pick their own shares rather than trust their hard-earned cash to a fund manager and his fees, an investing guru tracking website Stockopedia aims to solve that exact conundrum.

It takes the idea of share screening and adds in a cunning twist.

Not only can you drill down into individual stocks, but you can also check what shares would fit into the strategies of a whole host of famous and successful investors and build your own portfolio based on this.

That means that if you do fancy investing like Warren Buffett, you can take a look the portfolio of UK shares that match his investing criteria, check their performance and then drill down to take a better look at those companies.

The Buffettology sustainable growth portfolio on the site is up 11.75 per cent since inception in mid-December, beating the FTSE 100’s 4.6 per cent gain and has an annualised projected return of 21 per cent. Stocks that fit include property listings firm RightMove, Domino’s Pizza and drugs giant AstraZeneca, among others.

If you don’t fancy Buffett you could try shares that match famed UK stock-picker Jim Slater’s Zulu Principle, a portfolio that matches value investing godfather Ben Graham’s ideas, or even baskets that adopt academic research, such as Josef Piotroski’s F-score.

Each portfolio includes the list of UK shares that match its criteria and investors can click through to investigate the fundamentals of individual shares in more detail. Stockopedia comes with a £14.99 a month or £149.99 a year subscription charge.

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Why follow a strategy?

Ed Page-Croft, the mastermind behind Stockopedia, explains that the investing guru portfolio idea is not aimed at delivering individual share picks, but instead a basket of shares that all-important  strategy.

Delving deeper into shares

Follow the investing guru portfolios through to  the individual company pages of Stockopedia and there is a wealth of share information derived from Thomson Reuters data.
Here investors will find charts, a balance sheet running back five years and a host of investor ratios highlighted, from the commonly used such as the price to earnings (P/E) and Earnings Per Share ratios, to more complicated measures such as EV to EBITDA (Enterprise Value to Earnings before Interest, Taxes, Depreciation and Amortisation).
Financial strength measures and share dangers signs are also featured, such as the Piotroski F-Score, along with broker forecasts.

Fortunately, for anyone slightly baffled by that rather jargon-heavy summary of what’s on offer, not only does Stockopedia highlight these things but it also explains in simple terms what they are, why they are important and how they are used.

A former Goldman Sachs broker and a technology buff, Ed is also a private investor and keen student of investing philosophy.

He says that one of the biggest mistakes individual share pickers make is that their holdings are far too tightly focused, with on average many investors only owning a handful of different stocks and ploughing into hit or miss companies, encouraged by whatever the hot topic of the moment is.

This is hardly surprising when investors are bombarded with more information and opportunities to trade than ever before, yet among all those tips and get rich schemes there is a rich seam of solid investing wisdom that is rarely mined.

These are the books and academic papers that go into great detail on the famous investors and their methods. Astonishingly, in the great investing rush a lot of this potential gold dust gets overlooked, despite decades of evidence to show that many of these strategies work and the fact that some  have made the gurus behind them very rich.

It is this wealth of information that Stockopedia has drawn on to build screens that enable investors to find the shares that for a portfolio following that strategy.

Ed believes it is essential investors to use the information is as a portfolio builder rather than cherry-picking from them. He says: ‘Everyone is often looking for a hot tip but our job is building these lists to let people make their own decisions. I would want to buy the lists as a whole, so you are picking up the characteristics of those shares rather than individual companies.'

‘We have about 65 portfolios and the last time I looked about 75 per cent were beating the market this year.’

Market-beating: The Buffettology portfolio is up 11.75 per cent on its mid-December inception, compared to the FTSE 100 index's 5.5 per cent return.

Pick the winners you don’t know about and avoid the traps

One of the advantages of using a share screening service like Stockopedia is that it helps throw up companies that you would otherwise not find out about.

It also helps investors avoid getting caught in the traps that even the biggest household name dividend shares can lay.

Smaller companies

One of investing’s truisms is that the big company shares that attract the most broker recommendations, analyst research and column inches are rarely the ones that will deliver the bumper returns investors dream of bagging.

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Smaller companies and mid-sized firms on the other hand have great potential for growth but lie at the riskier end of the investing spectrum, as it takes much less to blow them off course than it does a FTSE 100 blue-chip giant.

Jim Slater, the share picker who came to fame through his share column in the Sunday Telegraph, outlined this in his investing bible The Zulu Principle. He picked that name for the book to highlight how it is easier to become an expert in less well-researched areas of life - not many people know much about the Zulus, so learn a little about them and you are soon better versed than most.

Slater wrote: 'Most leading brokers cannot spare the time and money to research smaller stocks. You are therefore more likely to find a bargain in this relatively under-exploited area of the stock market.'

The problem is that finding those smaller gems that combine good growth prospects with a solid backing can be tough, but set a screen to work and you can check for red flags that highlight any dangers from factors such as too much debt.

The income shares dividend trap

On the other side of the coin to those hunting smaller growth companies or undervalued shares, many investors like to look to higher-yielding dividend shares, yet even these come with pitfalls. 

The classic dividend trap share is a big name currently offering high income that investors are lured into believing is hugely undervalued, in fact, often it is actually a warning sign of bad things to come, as in the case of HMV’s bumper 10 per cent yield a few years ago.

Just as running a screen can help you pick out smaller unknown gems it can also sort the wheat from the blue-chip dividend chaff.

Hunting out hidden gems: Jim Slater's Zulu Principle portfolio is short on big names but has a forecast annualised return of 14.5 per cent on current performance

So do investing guru portfolios make you money?

The portfolios on Stockopedia are tracked daily on their performance and adjusted every three months, with shares that no longer meet criteria booted out.

The site explains it thus: ‘Risk and returns are tracked each day. The charts and tables…give an immediate overview of how a strategy has performed over time. We build a portfolio of equal weighted positions across the top 25 candidate stocks for each stock screen and rebalance the portfolio quarterly.’

Scanning through those portfolios is an interesting exercise. Most seem to have beaten the market, but the performance is only tracked through to their inception – typically the start of the year – so it is hard to get a fully tested long-term view.

The portfolios do come with annualised performance figures though (laying out what they would expect to achieve annually), some of which are very impressive.  The Dividend Achievers screen has a 16.9 per cent annual return, the Buffettology Sustainable Growth screen records 21 per cent, while the Naked Trader screen delivers a bumper 32 per cent.

What’s the catch to investing like this?

Firstly, as Stockopedia is extremely keen to stress, these are just ideas and investors should not simply blindly follow any of these screens, however rich the big name they are based on.

If you are going to be an individual share-picking investor then you need to be willing to put in the time and commitment to delve properly into company figures with some solid personal research, albeit this is something that Stockopedia’s useful and easy to navigate data can help with.

So this isn’t a get rich quick shortcut that means you can just pick a portfolio because you like the look of its performance figures, then just buy all the shares, sit back, relax and put the Porsche on order.

How to invest in funds and trim your costs

The sheer amount of work involved in individual share picking, combined with the tendency for investors to either stop at too few stocks or end up buying too many similar companies, means that many are better off leaving professional managers to do the job for them in funds or investment trusts.
The other option is to use low-cost passive tracker funds or exchange traded funds to simply track an index – these will never beat the market, but then neither do many actively-managed funds year-in, year-out.

• More on investing in funds

The other problem is that deciding to be your own fund manager is expensive, compared to the low dealing charges incurred investing in a similar sized basket of shares through an individual fund or investment trust.

Building a portfolio of 20 shares can prove an expensive endeavour thanks to dealing costs. Even an investor using a relatively low-cost online share dealing account is likely to end up paying £10 per purchase dealing costs, amounting to £200 on a 20-share portfolio.

On a £5,000 portfolio that is the equivalent of a 4 per cent charge, whereas on a £10,000 portfolio it is 2 per cent. Investors also need to pay stamp duty of 0.5 per cent on share purchases.

Ideally, such a portfolio should not involve too much trading and dipping in and out of stocks, so further dealing fees will be kept to a minimum – although some screens are likely to find shares falling out more often than others.

Investors also need to consider the cost of adding to their investments and how this will involve extra dealing costs. One of the best ways to build your funds over time is regular monthly saving, however, even the cheaper platforms for monthly share purchases tend to charge about £1.50 per month per line of shares. 

That makes investing monthly over 20 shares very expensive, with a £30 charge eating 6 per cent of even a substantial £500 per month savings plan. One way round this would be to rotate investments, into perhaps five shares per month, taking charges down to £7.50 – this is a 1.5 per cent of a £500 monthly investment.

Of course, those charges will seem like small fry if deciding to invest like a guru helps you strike it rich and you do manage the bumper 20 per cent a year returns that a portfolio like the Buffettology screen highlights.

Remember though, even when dealing with methods that have made some very famous investors very rich indeed, past performance is no guarantee of future gains!

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