Anyone who has read about investing would likely have heard about Warren Buffet. Many books have been written about him and there are many people who try to copy his investing styles. Heck, there are even people willing to part with over half a million dollars just to have a chat with him.
Unless those folks are purely thinking about donating that money for charity, I think they are pretty foolish because you can learn plenty about him just by going online and watching his interviews for free. For example, if you have about 5 hours to kill you can knock yourself out by watching the annual Berkshire Hathaway annual general meeting video where the spritely 88 year old and his 95 year old business partner answers many questions from their shareholders.
In reality, I think not many people are able to invest like Warren Buffet because the things he does would seem at odds with what other typical investors would do. If you think you are the next Warren Buffett, see if you are able to identify yourself with these traits.
Warren Doesn’t Diversify His Investments
Personally, Warren does not hold many stocks in his portfolio. In fact, 99% of the stocks that he owns is actually the Berkshire Hathaway stock. This makes him no different from founders of companies like Jeff Bezos, Bill Gates and Mark Zuckerberg who made their billions building their own business and then reaping the rewards as the stocks of their own company rise. Warren just happen to be in the business of making investments through Berkshire Hathaway.
Granted, Warren as CEO and Chairman of Berkshire Hathaway, controls the investments that Berkshire makes. But then, over 50% of the publicly known holdings of Berkshire by value is just in 4 companies.
|Stock||Value||% of portfolio|
|Bank of America||25 billion||12%|
|Wells Fargo||21 billion||11%|
Top 4 holdings of Berkshire Hathaway as of 30th September 2018
His partner, Charlie Munger is no different. Charlie’s portfolio of almost $140 million has just a paltry 4 stocks and almost entirely in the financial sector.
How then does Warren and Charlie manage the risk of having such a concentrated portfolio? Two ways primarily: buy when the value is attractive and buy only when they really understand its business.
The two are closely related. Warren Buffet is known to be a value investor and that means, in one way, judging the value of a company by estimating its future cashflow. He can only do so with relative confidence if the company is in a business that he is familiar with. And it is one of the reason why he initially stayed away from tech stocks because he had no idea how to value a business with hardly any cash flow. Only when the stock price is at an attractive discount to its value would Warren buy into the share.
Warren and Charlie are so certain of their value estimates that once they decide to invest in the company, they will buy up very large stakes, billions in the case of the 4 companies above. It is not uncommon to find Berkshire buying up shares when large institutional investors are selling, hence value is truly in the eye of the beholder.
Warren Buys The Boring Stuff
No where in the list of investments of Berkshire Hathaway do you find the FANG stocks (Facebook, Amazon, Netflix, Google). Warren certainly does not suffer from FOMO and sticks to his guns with the old familiar names.
When Warren finally bought Apple, it seemed as if he has finally cratered to the pressure of investing in high-growth tech stocks. However, Apple does trade at attractive valuations. It enjoys the lion share of the margins within the supply chain and yet it trades at a discount to its suppliers.
A company that grows revenue at an amazing rate but does not produce meaningful operating cashflow does not catch the attention of the master value investor Warren Buffet.
Warren Does Not Trade Stocks
What I mean by trading here is short term trading. When Warren builds a big position in a company, he does it with conviction and holds it through the ups and downs of the stock price. His position in Apple was built from 2017, Bank of America from 2011, Wells Fargo from 1990 and Coca-Cola from 1998.
Because he makes big buys into companies when their stock prices are at an attractive value, and then hold onto them as the stock prices grow, he builds a buffer that protects him during the periods of short term drops.
Take the example of Apple, whose stock price plunged about 1/3 of its peak value from September 2018. The average investor, particularly those who do short term trading based on stock chart movements, would likely have been spooked and decided to ‘cut their losses’ during this time. Warren was holding onto $43 billion of Apple shares as of the end of September and would have seen about $14 billion wiped out by New Year Eve of 2018.
But I would bet that he’s still holding onto those shares because he bought the shares back in 2017 and early 2018 when the share price was much lower than the peak of September 2018. By February 2019, I think he’s pretty much broken even with his purchase price with the recent small recovery of the Apple stock price.
However this doesn’t mean that Warren Buffett never sells. The median holding period of a stock in the investment portfolio of Berkshire Hathaway is just one year, which is probably similar to other value investors. It does mean that when he strikes a winner, he holds it until he believes that the price no longer justifies its value, which can be for years, even decades.
Are You A Warren Buffett?
I do not know. But I do know that it’s darn risky to invest like him. It’s tough if you have no idea how to value a business properly and near impossible if you do not know much about the business that the company is in. Even the average investment fund manager, who does this for a living, cannot perform better than what the average stock market is doing.
It’s not enough having the guts to buy the stocks that everyone else is selling, you need to do it with both eyes open and well aware of what you are doing. If you are buying into hot-tips, do you wonder if it is because the others are already trying to get out?
Perhaps this is why Warren is as legendary as he is now. After about 7 decades of investing, he is still the most famous one. For the other lessor souls, it would be better not to bet the whole farm like Warren (hint: index funds).