Top ASX stock to buy as a thrifty investor (the old Warren Buffett way)

I reckon this ASX stock would be a prime contender if Warren Buffett was working with $10,000 or less and lived in Nerang instead of Nebraska.

| More on:
Business man with a cigar in his mouth counting US dollars.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Paying $80 for a $100 note… sounds too good to be true. Yet, that's essentially how Warren Buffett made market-beating returns early in his investing career. Do these opportunities still exist among Australian companies? I believe so… and I've found what could be the top ASX stock to buy for this 'deep value' approach.

The $788 million company is a candidate for the legendary billionaire's old investment strategy, but it also might be an improvement. While most of Buffett's picks under this approach were good for a quick buck, this S&P/ASX All Ordinaries Index (ASX: XAO) company could have long-term legs.

Warren Buffett's highly profitable, old-school strategy

You might be wondering… what is the investing strategy that the co-founder of Berkshire Hathaway Inc (NYSE: BRK.A) (NYSE: BRK.B) used to apply—and if it were so good, why is it the old Warren way? Wouldn't the great Buffett still be putting it to work?

Well, the approach is referred to as 'cigar butt investing'. It's a value investing strategy at its core. You want to find a company that has been discarded — like a cigar butt — that still has more puffs of smoke in it. In other words, the company still has more value than investors give it credit for.

Looking at a business's book value is a simple way to identify companies that may fall into this category.

In a worst-case scenario, a business can be liquidated, selling its assets to erase debts and provide any leftover case to investors. A company's book value can roughly estimate its liquidation value. A price-to-book (P/B) ratio below 1 might indicate that there's some value to be realised.

How profitable was this way of investing for Buffett? Take a look for yourself at the returns under the Buffett Partnership compared to the Dow Jones below:

YearBuffett PartnershipDow Jones
195710.4%-8.4%
195840.9%38.5%
195925.9%20.0%
196022.8%-6.2%
196145.9%22.4%
196213.9%-7.6%
196338.7%20.6%
196427.8%18.7%
196547.2%14.2%
196620.4%-15.6%
196735.9%19.0%
196858.8%7.7%

The Oracle from Omaha closed down this fund after 1968. Buffett later justified this by saying the fund had become too large to find cigar butt investing stocks big enough to move the needle at its size. However, that shouldn't be an issue for people like you and me — unless you've won the lotto…

ASX stock to buy with plenty of puff

Rural Funds Group (ASX: RFF) is a perfect candidate for cigar butt investing. The Australian real estate investment trust (REIT) owns a mix of agricultural assets across the country and trades on a P/B ratio of 0.7 times book value.

As I said, this company is valued at nearly $790 million. Yet Rural Funds Group holds $1.045 billion in net assets when you subtract the liabilities. In my opinion, this suggests a straightforward path to a 32% upside for this ASX stock.

It's not without its risks. The value of its properties can fluctuate depending on weather conditions, natural disasters, and leasing arrangements. However, land is in high demand and short supply. As such, I'm confident land prices are more likely to appreciate than depreciate.

Lastly, I think this top ASX stock to buy is better than a traditional cigar butt pick because of one key reason…

Buffett was looking for one puff to boost a company's share price before offloading. In contrast, I believe Rural Funds Group could be the cigar that keeps on giving in the long run. Developing and managing land for various intensive activities is critical. Rural Funds has the know-how and capital to keep acquiring land and adding value.

Motley Fool contributor Mitchell Lawler has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has positions in and has recommended Rural Funds Group. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Opinions

A elder man and woman lean over their balcony with a cuppa, indicating share rpice movement for ASX retirement shares
Small Cap Shares

Why I think this ASX small-cap stock is a bargain at 58 cents

This stock looks like a great buy, in my opinion.

Read more »

A young man wearing glasses writes down his stock picks in his living room.
Opinions

2 amazing ASX shares I wish I'd bought earlier

I think these stocks are performing incredibly well.

Read more »

ASX 200 retail shares a woman smiles over the top of multiple shopping bags she is holding in both hands up near her face.
Opinions

Up 90% in a year, is it too late to buy Zip shares?

Should investors buy this stock now or wait until later?

Read more »

A trio of ASX shares analysts huddle together in an office with computer screens all around them showing share price movements
Opinions

2 of the best ASX 200 shares to buy right now

I think these stocks are excellent buys for the long-term.

Read more »

Concept image of a businessman riding a bull on an upwards arrow.
Opinions

I'm very bullish on these 2 ASX stocks

I think these are two of the best ASX investments money can buy.

Read more »

Young businesswoman sitting in kitchen and working on laptop.
Opinions

Should I buy Berkshire Hathaway or Soul Patts shares?

Both have been stand out investments over the long term.

Read more »

A photo of a young couple who are purchasing fruits and vegetables at a market shop.
Opinions

Here are 2 of the ASX's most hated shares. Which should I consider buying?

Could today's dogs be tomorrow's stars?

Read more »

A man sits in deep thought with a pen held to his lips as he ponders his computer screen with a laptop open next to him on his desk in a home office environment.
Opinions

Where I'd invest $5,000 into ASX shares today

I’m excited by what these stocks can achieve.

Read more »