What We Can All Learn From the Oracle of Omaha
We’ve all heard about Warren Buffett, the 86-year-old multibillionaire known for his sense of humor, his multi-billion dollar donation to the Gates Foundation, and his remarkable ability to create wealth. How does he do it?
Buffett and Berkshire Hathaway
Warren Buffett is chairman of Berkshire Hathaway, a multinational conglomerate holding company. What does this mean? Well, in simple terms, the company invests in or owns a variety of other corporations that make products sold all over the world, to put the size of the company in perspective, Berkshire Hathaway files a 30,000+ page Federal income tax return.
In the 1950s, Berkshire, which made linings for men’s suits, and Hathaway, a cotton milling company, merged. Buffett began investing in Berkshire Hathaway in 1962, becoming its Chairman and CEO in 1970. Charlie Munger, his partner, is Vice Chairman. As the textile business struggled, he eventually abandoned that segment of the business in 1985 using the cash flow to invest in marketable securities.
In the early 1990s, Buffett began to focus on owning entire businesses, and today Berkshire owns 43 major companies, the majority share of several other major publicly-traded companies and minority holdings in dozens more. Berkshire’s biggest ownership segment is in the insurance industry, owning GEICO and several smaller insurers. Berkshire also owns Burlington Northern Santa Fe Railroad, along with a trucking company and national auto dealer chain. Additionally, Berkshire owns and operates power plants, natural gas lines, hydroelectric dams, wind firms, and solar projects.
The ownership list includes:
GEICO, Applied Underwriters, General Re, Kansas Bankers Surety Company, National Indemnity Company, Central States Indemnity Company, Wesco Financial Corporation, The Pampered Chef, See's Candies, Fechheimer Brothers Company, Garan Children's Clothing, H.H. Brown Shoe Group, Justin Brands, CORT Business Services, Jordan's Furniture, Larson-Juhl, Star Furniture, Acme Brick Company, Benjamin Moore & Co., Clayton Homes, ISCAR Metalworking, Johns Manville, Precision Steel Warehouse Inc., The Buffalo News, Business Wire, Omaha World-Herald, XTRA Corporation, McLane Company, Ben Bridge Jewelers, Borsheim's Fine Jewelry, Helzberg Diamonds, Scott Fetzer Companies, NetJets, NetJets Europe, FlightSafety, CTB Inc., Burlington Northern Santa Fe Corp., Blue Chip Stamps, SE Homes, Cavalier Homes, Lubrizol, Brooks Sports and Forest River.
Berkshire also holds the majority of United States Liability Insurance Group, Dairy Queen, Fruit of the Loom, Nebraska Furniture Mart, MiTek, and Berkshire Hathaway Energy. As Buffett writes, “Our appetite for owning so many businesses increases our chances of finding sensible uses [for our cash].”
Berkshire Hathaway has been an overwhelmingly successful company. In the 52 years that Buffett has controlled the company (1965-2016), Berkshire has grown at an average rate of 20.8% annually. During this time period, the S&P 500 has averaged 9.7% each year. Buffett doesn’t just beat the market – he smashes it.
So, what are Buffett’s strategies for growing this wildly successful company?
Strategies of the Oracle of Omaha
Probably the most successful investor in history, Buffett is known as the “Oracle of Omaha” for his ability to predict an investment success through evaluating whether to buy or invest in a company.
So what’s his strategy? In a nutshell, Buffett is a value investor. A bargain hunter, he searches for stocks that are valuable but not recognized as being valuable by most other investors. Thus, he can buy a company when it stock prices are what he believes are unreasonably low.
However, Buffett isn’t especially interested in how the market treats his new stock. He chooses investments based on the overall potential of the company to generate earnings. He buys and holds stocks and companies for the long-term, with his primary concern being how well the company can make money for its shareholders. If the company does well, of course, its share value will eventually increase.
Buffett outlined one of his beliefs in his most recent Annual Shareholder Letter when he said, “…you should never forget two things: First, widespread fear is your friend as an investor, because it serves up bargain purchases. Second, personal fear is your enemy.Investors who avoid high and unnecessary costs and simply sit for an extended period with a collection of large, conservatively-financed American businesses will almost certainly do well.”
Essentially, Buffett waits until a great opportunity presents itself, as opposed to wheeling and dealing all day with his holdings.
Can Buffett’s strategy of long-term value investing work for you?
Understanding Your Circle of Competence
Buffett’s strategy requires patience and a long-term focus, he recognizes investing is difficult and has said, “There is nothing wrong with a ‘know nothing’ investor who realizes it. The problem is when you are a ‘know nothing’ investor but you think you know something.” It's critical to stay within your circle of competence.
Paul R. Rossi, CFA