I’ve got nothing against lithium. It looks likely that this future-facing metal is going to play a big part in the world’s transition to providing cleaner energy. But I’m willing to bet the legendary investor Warren Buffett isn’t interested in investing in lithium.
Buffett is famously generous with giving out investing wisdom. As such, we know what he typically looks for in an investment. Buffett’s methodologies have helped him return upwards of 20% per annum in the investment portfolio of Berkshire Hathaway Inc (NYSE: BRK.A)(NYSE: BRK.B) over his 60-year investing career.
Buffett’s typical investing checklist includes finding companies with intrinsic competitive advantages (or ‘moats’), a management team with integrity, an easy-to-understand business model, and (of course), buying it at the right price:
The reason why Buffett hasn’t ever bought a lithium stock? Most fail that first hurdle before they even get off the ground.
Buffett wouldn’t buy lithium
A lithium miner is still a miner, even if the company possesses a key ingredient for a cleaner future. This means that a lithium producer has to sell its products at a common market price. Most of Buffett’s long-term holdings aren’t restricted by this kind of barrier.
Take Berkshire’s largest position: Apple Inc (NASDAQ: AAPL). Apple has some of the best margins in the world because of its globally dominant brand. The company can basically charge whatever it likes for its products, safe in the knowledge that its customers will be happy to pay top dollar for the privilege of owning something with the famous Apple logo on it.
A lithium producer has no such luxury. It has almost no influence over what it can charge the buyers of its products. This doesn’t matter so much when lithium prices are rising. But when the inevitable commodity cycle plays out and lithium prices go through a tough time, all producers will suffer, regardless of ‘brand power’.
So I’m following the Buffett playbook in 2023 and limiting my search to companies that I can understand, have intrinsic competitive advantages, top management teams and compelling prices.
But I’ll be taking a pass on Core Lithium Ltd (ASX: CXO), Pilbara Minerals Ltd (ASX: PLS) and Liontown Resources Ltd (ASX: LTR). It’s not that these companies are poor businesses. They just don’t fit into the Buffett investing framework I like to try and stick to.
The post Forget lithium! I’m using the Warren Buffett method to help find winning ASX shares in 2023 appeared first on The Motley Fool Australia.
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Motley Fool contributor Sebastian Bowen has positions in Apple and Berkshire Hathaway. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Apple and Berkshire Hathaway. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has recommended the following options: long January 2023 $200 calls on Berkshire Hathaway, long March 2023 $120 calls on Apple, short January 2023 $200 puts on Berkshire Hathaway, short January 2023 $265 calls on Berkshire Hathaway, and short March 2023 $130 calls on Apple. The Motley Fool Australia has recommended Apple, Berkshire Hathaway, and Premier Investments. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.