The Oracle of Omaha and CEO of holding company Berkshire Hathaway has been observed and idolized perhaps more than anyone in the finance community. With an average annual return of 19% over the Treasury rate and a personal sharpe ratio that is higher than all U.S. stocks that have been traded for more than 30 years (cfainstitutue.org), the most important question is how does he do it?
Buffet is a value investor, meaning he buys stocks that are cheap, high-quality, and low risk. He uses modest leverage to boost returns and stays true to his strategy when others would not. We can learn many things about both investing and running a business from Mr. Buffet.
Buffet follows a surprisingly simple investing strategy that includes products we use in everyday life. Some of his biggest holdings are in Coco Cola, Geico, Duracell, and Wells Fargo. If you use it all the time, you may want a piece of it. These “grocery cart” brands reflect traditional consumer needs, which translate into steady, long-term growth.
One of the most significant factors in Buffet’s strategy is due diligence, and lots of it! It’s like company analysis on steroids—Buffet usually doesn’t invest in a company until he has studied them for weeks. The goal here is to find great companies, and essentially waiting for them to become cheap. Instead of bouncing in and out of a few of your favorite companies, study all of them and strive to understand the industry drivers.
Detect Core Value
In a time when many companies employ all types of strategies to artificially boost returns and manage earnings, it can be difficult to detect core value. Pay attention to what you are actually investing in when you buy a company such as real estate, inventory, and intellectual property. What does the company actually do or provide, and how do they do it better than anyone else?
Stay Conservative and Consistent
Buffet is one of the most conservative investors, but that doesn’t mean he doesn’t take risks. He is conservative in the sense that he doesn’t invest with his emotions and stays in the game when others panic and sell. His measure and definition of risk probably varies quite a bit from commonly held beliefs about risk. He may double up on a bet when others run from it, but that’s because he believes it’s a good deal.
Lessons to Take Away
There is a lot to be said for the conservative, well-thought-out approach that Buffet uses. It is easy to get caught up in the excitement of markets and the hype that media can generate, but it needs to be balanced with a sound foundation. Consider your business and future investments that will make it better. Remember to focus on the core value you offer to customers and what is going to generate wealth for investors. As an outside CFO, I agree with many of Buffet’s strategies and have seen them work soundly in businesses I have consulted that are either investing or involved in M&A activity.
Here are a couple of my favorite Warren Buffet quotes.
“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”
“Go for a business that any idiot can run—because sooner or later, any idiot probably is going to run it.”