Warren Buffett's 'bottom up' approach to investing is what's needed in trying times

In this investing column, it is inevitable that there will be a skew towards investment opportunities rather than reasons to stay away. After all, if an investor is specifically looking for reasons not to invest, he or she will always find them.

And at present, such reasons are in ample supply – geopolitical concerns, populism, punchy valuations, a lack of inflation, a weak oil price and so on.

Add to this a situation where quantitative easing (QE) has yet to be unwound in the world's largest economies, interest rates perhaps need to rise at a faster rate than they currently can on the path to normalisation.

A heady mixture.

And yet, there are equally opposing and positive factors – a generally recovering economic recovery, dividend yield which tend to outpace both government bonds and certainly cash, strong corporate earnings, companies (both quoted and unquoted) awash with capital for investment, and equities remaining the investment destination of choice.

The availability of excess capital could be deployed in any number of ways – increased dividends, share buybacks, acquisitions, investment in staff and/or technology – all of which would be more beneficial to the wider economy than remaining unused on the company balance sheet.

Indeed, many of the reasons not to enter the market have sidelined investors – both retail and professional – with the result that in 2016 they would have missed a 14.4% return on the FTSE 100 and in 2017, 4% in the year to date – and these returns do not include dividends, which should add another 3.5% or so annually.

In such times of uncertainty, an alternative investment approach is not to start from the "top down" as described above in economic and global terms, but to take a "bottom up" approach.

This approach is almost defensive in that it seeks to identify individual companies by looking at, inter alia, a strong and stable cashflow, diversification in terms of both geography and business lines, and an enduring franchise with pricing power and growth potential.

These companies in turn will tend to exhibit higher dividend returns which, as we have described in previous columns, can then benefit from the wonders of compound interest when reinvested.

Perhaps the world's most famous exponent of the bottom up approach is Warren Buffett, a man who has always looked for companies which are surrounded by an "economic moat", ensuring a consistently high return on capital. This may be because there are high barriers to entry for other competitors to start up in the sector, because the company has predictable earnings or keep a strong balance sheet without too much borrowing – or all of the above.

Having identified such a company – "Only buy something that you'd be perfectly happy to hold if the market shut down for 10 years" – he concludes that "Our favourite holding period is forever."

Some of this wisdom was gleaned from Buffet's own mentor, another famous investor Benjamin Graham, who was of the opinion that "In the short run, the market is a voting machine but in the long run it is a weighing machine."

As such, opportunities remain, even at the market's slightly higher levels of valuations. In the next column, we will look at applying these principles and identify a couple of examples of (UK) stocks with enduring appeal – the kinds of stocks of which Warren Buffett might approve. At the same time we will highlight how their performance – and prospects – set them apart from the crowd.

At the same time, we will highlight how this fits in with rest of the investment jigsaw we have been describing in my columns to date – a longer term horizon, psychological detachment, an ability to look through the "noise" and how picking individual stocks might compare with an individual's attitude to risk and capital and/or income requirements.

Richard Hunter is the Head of Research and investment committee member at Wilson King Investment Management . The former Hargreaves Lansdown, Natwest Stockbrokers and Fyshe Horton Finney industry veteran is a Fellow of the Chartered Institute for Securities & Investment (FCSI) with over 30 years of stock market experience.