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Warren Buffett invests "not to lose" rather than trying to pick the top performers. This is a big reason that, even with a stock picking method simple enough I've euphemistically called it "Not-Stupid Investing," adrenalin-seeking investors find it too boring to implement despite it's proven success.
The tenets of Not-Stupid Investing are even more important now, in a market environment rife with potential inflection points. The Berkshire strategy helps investors through burning questions like "Is the 30-year bull market in bonds over?" and "Will the U.S. economy actually recover this time or is this another head fake?"
All of Mr. Buffett's stock selection criteria – long-term stability of cash flow growth, sustainable competitive advantages, high quality management – are an attempt to ensure that growth will continue no matter what happens in an unknowable future – with the economy, industry dynamics, interest rates, energy costs or geopolitics.
Applying the Berkshire investment doctrine takes discipline, patience, full attention on potential downside and a complete abhorrence for economic forecasting.
To do it right, investment candidates are extremely limited – only those that will grow cash flow over the long term even in the event of another deep recession, $200 (U.S.) oil or other market calamity.
Investing in secular growth trends – those not dependent on strong economic growth – are one of the best ways to offset the risk of future portfolio calamity.
The health-care sector is a good example of a secular trend. Developed world populations will age whether there's a recession or not. The elderly need more pharmaceuticals and medical care whether they can afford it or not. Increasingly cash-strapped public health-care systems will likely be forced to invest in efficiencies, which will boost revenues for any technology firms – including software – with a financial interest in the sector.
Global agriculture is another industry where long-term growth appears sustainable. A recent paper from the Earth Policy Institute calculates that if China's pork consumption climbs as the Organization for Economic Co-operation and Development expects, the country will require an additional 240 million tonnes of coarse grain per year by 2022.
China is not alone. The steadily rising stand of living in the developing world, and the increased meat protein demanded as a result, will put severe strains on global agriculture and upward pressure on the prices of everything we eat.
The cloud computing trend fits the bill in some ways, but not others. On one hand, the growth outlook is strong. Writing for ZDNet, IT consultant James Staten recently projected that cloud-related revenues would more than triple from 2013's $58-billion to almost $200-billion by 2020.
On the other hand, valuations in the cloud space are prohibitive in most cases. Amazon.com Inc., for instance, currently trades at 527 times trailing earnings.
There's the other important point that Mr. Buffett himself avoids tech investments. He has stated that it's because he doesn't understand technology, but my suspicion is that he's uncomfortable with the fact that once-dominant companies in the sector – Netscape and BlackBerry are good examples – can't maintain their competitive advantages.
As a beginning step toward a Not-Stupid investment portfolio, the accompany table lists a number of potential beneficiaries from secular growth trends. In many cases, the companies do not have the stable earnings histories Berkshire demands, nor are they trading at the kind of deeply discounted valuation levels Mr. Buffett likes.
In future posts, we'll apply the full Buffett valuation analysis on companies in these secular growth sectors and establish valuation levels that are attractive in light of market history. In the meantime, we have a universe of stocks to start researching in preparation for a day when one of them dips for some temporary reason.
Then we can pounce like Warren Buffett.
Follow Scott Barlow on Twitter @SBarlow_ROB
Scott Barlow