Has Warren Buffett really lost the plot?

As critics stand by to write him off, the legendary US investor may have Lloyds TSB in his sights. Dan Gledhill reports

Ever since it emerged that Warren Buffett was building a stake in a British stock, investors have been placing their bets on the identity of the blessed company. Shares in Allied Domecq, Cadbury Schweppes and Marks & Spencer have all been boosted by speculation that they are the beneficiary of Buffett's legendary stock-selection process.

Such is the Sage of Omaha's global reputation as an investment genius that a multitude of disciples act on his every word. Only last week, thousands of them gathered in his home town of Omaha for the annual meeting of Buffett's Berkshire Hathaway investment company - there to pay tribute to the man who has made their fortunes.

His real British target may in fact be Lloyds TSB, according to US fund manager Robert Hagstrom. He should know, having just published his second book on Buffett, entitled The Warren Buffett Portfolio.

"Lloyds TSB is a company with the recognisable Buffett pattern," says Hagstrom. "It has a high return on equity and is well-run. The management has done a great service for shareholders. It is almost the perfect investment for Warren Buffett."

But Hagstrom does point out that he has shares of his own in Lloyds TSB. This is not surprising, given that he counts Buffett as the greatest influence on his own career, managing money for Pennsylvania-based Legg Mason Focus Capital.

It is difficult to imagine a better role model. The son of a Nebraska stockbroker, Buffett started out in 1954 with $100 of his own money. He parlayed that into a successful 1960s-style hedge fund; liquidated its portfolio at the top of the market in 1969; then bought a sleepy New England textile company called Berkshire Hathaway, and turned it into his holding company. His investments are now worth more than $100bn (pounds 62bn).

Until last year, Buffett, 68, had out-performed the benchmark S&P 500 US stock market index for the last 34 years. His own Berkshire Hathaway shares make him America's second richest man after Bill Gates, with an estimated $36bn.

"There are two reasons why he's the most successful investor," explains Hagstrom. "He recognises that stocks are businesses, and he analyses them better than anyone else on the planet.

In his book, Hagstrom describes the investment style that has served his mentor so well. In a nutshell, Buffett and Charles Munger, his septuagenarian right-hand man, invest in a handful of under-valued companies, such as Coca Cola and Gillette, whose businesses they know and understand. They are in it for the long haul, a strategy which enables them to survive - and even to prosper - when markets fall and when bargains appear.

"Nothing changed during Wall Street's fall last October - except that it made us anxious to invest a lot more money as the probability of investing profitably increased," explains Hagstrom, echoing Buffett's philosophy. Buffett bucks the modern wisdom of investing in rising stocks, preferring to find value in those left behind when the market rallies.

"Many shareholders end up spending more time on the speculative side, looking at share prices, than on the investment side, looking at businesses," says Hagstrom. "They think they're investing, when really they're just speculating."

Speculators they may be, but the hordes of American investors whose mindless buying has pushed Wall Street to record highs are a self-fulfilling majority. So much so that Buffett failed to beat the market last year for the first time in a generation. He shouldered the blame himself, wishing he had spent more time in the cinema than picking stocks in the office.

Buffett has been left behind by the rally in technology stocks, a sector he claims not to understand. All of a sudden, his homespun values and small-town charm have begun to look out-dated in a computer-driven age when tracker funds and growth stocks dominate.

Scribes eager to write his obituary were given more fuel last week when the subject of life after Buffett was raised at the Berkshire Hathaway meeting - Buffett said that a letter naming his preferred successor had been put in a safe.

Hagstrom does think that Buffett has been a victim of his own success. Berkshire Hathaway is now so big that Buffett and Munger are struggling to find investments large enough to make an impact on its value.

But Hagstrom believes that Buffett's core sectors - advertising, consumer products, financial services, healthcare and media - have the scope to out-perform the S&P 500 in forthcoming years.

"I think it is too premature to say his best days are behind him," says Hagstrom.

Even when Buffett does go, Berkshire Hathaway is unlikely to turn into a dynastic concern. His children - Howard, Peter and Susie - are not considered likely successors. Instead, Lou Simpson, himself in his 50s, is expected to assume the mantle of Warren Buffett.

"People forget that Berkshire Hathaway is very deep in talent," he says. "Sure, the stock will go down when Buffett retires, but then it will be mis-priced. Anyway, I think he would love to do the job for another 30 years."