The resignation of Warren Buffett as CEO of Berkshire Hathaway, the company he’s run for six decades, is a great time to reflect on his investment style and how we can use it in our investing strategy.
His annualised year return over the past 60 years is 19.9%, well ahead of the S&P 500’s return of 10.4%. And interestingly, for a third of that time he actually underperformed the index.
Buffett started as a value investor in the style of Benjamin Graham but later adopted the growth at reasonable value (Garp) strategy pioneered by Peter Lynch.
So, how can you invest like Buffett? Find high-quality companies and buy when they offer a reasonable price. And then hold pretty much forever.
This strategy kept Buffett out of all sorts of fads, including the dot-com bubble and even most of the Magnificent 7 tech stocks (he does hold Apple, but his appointed successor, Greg Abel, prompted that investment).
His large listed holdings, such as American Express, Bank of America and Coca-Cola, prove that you don’t need bling to do great. They’re all “boring” companies, but they are high quality, have strong moats and produce good cash.
It’s that cash that really helped grow Berkshire. Buffett famously never paid dividends, but he loved getting dividends from the stocks he owned as he could then invest them into more businesses.
See’s Candies was one of Berkshire’s first investments, in 1972. It wasn’t an exciting company on the surface, but it was very profitable and it generated lots of cash. Importantly, management was allowed to keep the company as it was; it wasn’t required to adopt new ideas, concepts or markets. Buffett liked it just the way it was. The lesson here is that too much innovation can distract management, force bad acquisitions and lead to a deterioration of the main business. Large mergers & acquisitions are generally a horror show and often a big red flag that it’s time to find somewhere else to invest.
Berkshire’s cash holding amounts to about a third of the value of the company. This is in part because it has found it difficult to come by deals that will really move the needle, but also because it wants a reasonable price and is prepared to wait, years or even decades. Then, when prices do become reasonable, often during a crisis such as the 2008/2009 meltdown, Buffett goes on a spending spree.
Berkshire also had the benefit of essentially being a closed fund. You could sell your shares, but you couldn’t redeem them. That’s exactly how our portfolios operate. Ideally we never dip into our investments until retirement, making it a closed fund that can grow uninterrupted.
A last important point: more than 90% of Buffett’s wealth has been accumulated since he turned 65. That’s the power of compounding; it starts slow and then speeds up.
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