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I’m sure billionaire investor Warren Buffett needs little introduction. His annual letters to shareholders and public appearances have cemented his role as a mentor for generations of investors.
The Motley Fool and Buffett believe in many of the same investment principles:
- Long-term investing over short-term trading
- Invest in businesses not stocks
- Avoid smarty-pants financial jargon
- Time in the market rather than timing the market
Here, I’ll highlight three simple yet powerful pearls of wisdom from the ‘Oracle of Omaha’. These helped me find UK stocks like Games Workshop (LSE: GAW), which has now more than doubled in five years.
Favour a simple business
Buffett advises: “Never invest in a business you cannot understand“. He prefers clear and simple business models.
To me, Games Workshop, the maker of iconic tabletop game Warhammer, is a perfect example of a straightforward business. It designs, manufactures, and sells its products to an extremely loyal fan base through its own stores, online, and third-party retailers.
The FTSE 250 firm describes its business model like this: “We have a simple strategy at Games Workshop. We make the best fantasy miniatures in the world, to engage and inspire our customers, and to sell our products globally at a profit. We intend to do this forever. Our decisions are focused on long-term success, not short term gains“.
Simple strategy. Selling products globally at a profit. Decisions focused on long-term success, not short-term gains. These are precisely the qualities Buffett seeks in an investment.
Oh, and “forever” is Buffett’s ideal holding period for companies he expects to keep thriving (think Coca-Cola and Apple). This is how I view Games Workshop.
Find moats
Buffett also famously looks for businesses with strong ‘economic moats’ (competitive advantages). He says: “The most important thing is trying to find a business with a wide and long-lasting moat around it.”
In my opinion, Games Workshop has a deep and wide one. Its unique intellectual property, strong brand, loyal customers, and control over its distribution channels make it very difficult for competitors to muscle in.
This wide moat has helped the firm grow both its revenue and earnings at a very impressive rate.
| Financial year (ends May) | 2020 | 2021 | 2022 | 2023 | 2024 | Compound growth rate |
|---|---|---|---|---|---|---|
| Revenue | £270m | £353m | £415m | £471m | £526m | 18.1% |
| Operating profit | £90m | £152m | £157m | £170m | £202m | 22.4% |
| Net profit | £71m | £122m | £128m | £135m | £151m | 20.7% |
High profit margins
Speaking of profits, Buffett’s often highlighted the importance of a strong gross margin. This shows the percentage of sales revenue left after subtracting the cost to make a product.
He has a rule of thumb that a company’s gross margin should be 40%, or higher. Last year, Games Workshop’s underlying core gross margin expanded to 69.4% from 66.5% in the previous financial year. The net profit margin wasn’t far off 30%! That’s incredible.
The company’s ability to generate high margins like this reflects its strong brand loyalty and pricing power. However, this needs to be managed carefully as those battling armies of plastic miniatures aren’t cheap.
Indeed, there’s a risk that customers could baulk at any further price hikes, especially with the cost-of-living crisis still lingering and many people remortgaging their homes at higher rates.
This FTSE 250 stock carries a premium valuation. But I think it’s earned it with its simple yet powerful business model and fat profit margins. There’s also a 3.5% dividend yield.
If I didn’t own the stock, I’d buy it to hold for the next 10 years.