Warren Buffett is without question one of the top investors of our time. His investments made through his financial holding company Berkshire Hathaway have enabled him to build a fortune estimated at several tens of billions of dollars.
Even though he has never written a book, his voice remains highly respected among investors. We will, therefore, endeavor to describe here the man, but also his investment philosophy, his greatest successes and his most resounding failures. We will also give you her advice and her favorite books on the stock market.
WHO IS WARREN BUFFET, THIS AMERICAN BILLIONAIRE?
Warren Buffet’s studies, a great fortune in the world
Warren Buffett was born in 1930 in Omaha. His father is a member of Congress and a stockbroker. Attracted by the economy and the financial markets, he studied at the University of Nebraska and then joined Columbia where he followed the courses of financial analyst Benjamin Graham, whom he deeply admired.
It will come out with a master’s degree in economics. He then worked for his master, from 1954 to 1956, at Graham-Newman Corp. in New York, with Walter Schloss also a student of Benjamin Graham.
These two years during which he has invested in numerous companies alongside Benjamin Graham are absolutely essential for Warren Buffett. He deepens his knowledge of his master’s investment method and begins to forge his own.
“It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently”
The independence of Warren Buffet at only 25 years old:
When Graham retired, he returned to Omaha to found a family investment company there. At just over 25, he becomes his own boss, which he will remain all his life.
The initial capital, of $ 100,000 in 1956, was multiplied by 30 when the company was dissolved in 1969. Meanwhile, in 1965, Warren Buffett acquired a textile business from a small town in Massachusetts: Berkshire Hathaway. He totally changed the financial structure of the company and, even if he initially kept the textile activity of the company, he also made it a holding company for other investments.
The extraordinary rise of Warren Buffet:
During the following decade, in 1973-1974, after the oil shock, Warren Buffett took advantage of the collapse of the markets to acquire a good number of companies at low prices.
The rest, as we know, Warren Buffet never stopped applying his investment strategies in value, becoming the third richest man in the world (after Jeff Bezos and Bill Gates), at the head of a company weighing more than 530 billion market capitalization.
INVESTING LIKE WARREN BUFFETT: STRATEGIES AND PHILOSOPHY OF ONE OF THE WORLD’S LARGEST FORTUNES:
Buffett: a value investor
As we have seen, Warren Buffet is a disciple of Benjamin Graham, and therefore, a value investor. At the heart of its investment strategy, the estimation of intrinsic value, in order to position itself only on undervalued companies, that is to say, trading at a price lower than their fundamental value (with a safety margin).
If he kept Graham’s investment philosophy, he adapted his investment strategies to the point of creating his own investment style. Thus, Warren Buffett has invested in many companies in which his illustrious master would never have set foot.
The reason: Buffett has freed himself from only balance sheet analysis and is also studying the valuation of growth. He, therefore, added to Graham’s approach the assessment of a company’s future growth potential.
Key elements of Warren Buffett’s investment strategy
At the heart of Warren Buffett’s strategy, we, therefore, find the following elements: intrinsic value, safety margin, independence from the financial markets, but also discipline, patience, adaptation.
Warren Buffett also advocates moderate asset diversification. According to him, a portfolio must find the right balance between too high a concentration that would induce risks and an over-diversification which could harm profits.
Another element that is particularly close to Buffett’s heart: the Buy & Hold strategy. An investor, if he acquires good securities, must keep them over time and thus avoid the shortfall linked to a premature exit from a good investment.
Finally, Warren Buffett urges investors to adapt to the macroeconomic context and not to remain too fixed in his positions. Thus, the Omaha Oracle, after serious setbacks in 1989 with US Airways, had promised to no longer invest in the airlines, something he reiterated in the 2010s.
Similarly, the famous investor s is well guarded, at the turn of the millennium, to position itself on Tech (which enabled it to avoid being hit by the Internet bubble) but that did not prevent it, at the end of the 2010s, to bet on Apple then on Amazon. Changing your mind to adapt to the market is undoubtedly the most judicious approach.
Warren Buffett’s criteria for selecting an attractive asset:
Warren Buffett has a few selection criteria that allow him to identify great opportunities. Thus, a company will have to display:
good return on invested capital;
an easy to understand economic model;
regular cash flows;
competitive advantages allowing it to control its prices;
a relatively simple operation so as not to need the genius to be well managed;
easy to anticipate income;
a management managing the business as if he owned it.
WARREN BUFFET’S WISE ADVICE ON GETTING RICH:
Warren Buffet regularly provides investment advice to investors, in particular at the general meetings of his company Berkshire Hathaway.
“Rule number one: don’t lose money; rule number two, never forget rule number one. “
If this known quotation is more amusing than enlightening, the oracle of Omaha also has the habit of illustrating its great principles of investment by funny or edifying sentences.
Thus, on the need to fully understand the companies in which we invest, Buffett declares: “The risk comes from not knowing what we are doing. To explain the importance of choosing a company with solid fundamentals, he emphasizes:
“It is better to buy an extraordinary enterprise at an ordinary price than an ordinary enterprise at an extraordinary price.” Finally, he illustrates his love for the Buy & holdsan investment strategy by stating:
“Our preferred investment horizon is forever. “
WARREN BUFFETT’S INVESTMENT CHOICES AND PORTFOLIO:
Warren Buffett’s portfolio is, in accordance with his principles, moderately diversified and includes around forty companies. Note, however, that the company remains fairly focused on 6 main stocks: Apple, Bank of America, Wells Fargo, Coca-Cola, Kraft-Heinz and American Express.
Note that Apple has long been the only technological value held by Warren Buffet (about 25% of the portfolio anyway). Berkshire Hathaway nevertheless opted in May 2019 for an investment (the size of the stake is not yet known) in the global e-commerce giant Amazon, believing that it had been “silly” not to have invested in Jeff’s company Bezos before.
The selection process is always the same: find a company with good fundamentals, offering a known and recognized product, essential, present in very many points of sale and generating significant margins. The goal is to invest in large, well-established capitalizations with a strong competitive advantage (s) in their sectors.
We can take the Gillette success story, for example, to illustrate the investment strategy of the Oracle of Omaha. It is a company supplying everyday consumer goods, present in many points of sale (in the United States but also elsewhere in the world), holding a substantial market share, the leader in its sector: blades razor.
We also know the affection Warren Buffet has for the Coca-Cola group, which he likes the strength of the brand, the position of leader, distribution all over the globe in a considerable number of points of sale.
Financial sector stocks are also particularly appreciated by Omaha’s Oracle, whether Wells Fargo, Bank of America or even Goldman Sachs, which he helped bailout after the 2008-2009 financial crisis. It will be emphasized that this is a well-known sector of Buffett (and he always insists on the importance of investing in what we understand) and heavyweights of the bancassurance market.
WARREN BUFFET’S 5 MISTAKES AND BAD INVESTMENT CHOICES:
Warren Buffett, during his long investment career, made mistakes. He recognizes it himself and, far from throwing reproach on investors who make mistakes, he rather offers them a way out with one of his now-famous tips:
“If you ever find yourself in a sinking boat, the energy to change the boat is more productive than the energy to plug the holes.”
In other words, in the event of errors, there is no point in persisting, better to sell!
The oil company Conoco Philips:
Among the main errors of course in the extraordinary route of the Omaha oracle, we can note the oil company Conoco Philips, bought in 2008 at a price far too high.
Due to poor analysis of the situation (historical volatility in crude prices and the importance of the cyclical nature of the sector in particular), Buffett did not anticipate the fall in energy prices. Result: the investment of 7 billion has lost almost half of its value in 6 months.
We can also look back on the investment in the airline US Airways at the end of the 1980s. Warren Buffett, seduced by the considerable growth in turnover, did not anticipate that, for certain companies, very strong growth leads to a need for additional capital (new aircraft to be acquired in the specific case) which makes it impossible to increase profits.
The company Dexter Shoes:
The investment in 1993 in the company Dexter Shoes, is also one of the bitter failures of Warren Buffett who acquired shares in this company by thinking that it would keep its competitive advantage for a long time yet, which was not the case. The slate is worth $ 3.5 billion. The losses are heavy.
Its participation in the Kraft and Heinz merger:
In the spring of 2019, Buffett returned to what he considered an “error in judgment” to qualify his stake in the merger between Kraft and Heinz in 2015, believing that he had “overpaid” Kraft. The loss was 4 billion all the same.
The purchase of the Berkshire Hathaway business:
Warren Buffett’s biggest investment mistake is perhaps the one that gave his name to his investment company. When Warren Buffett bought the textile company, Berkshire Hathaway, in the 1960s, it was to turn the company around and make it profitable.
His efforts were in vain and, 20 years after his takeover, Buffett threw in the towel and completely abandoned the textile activities. It will now be exclusively a financial company!
BERKSHIRE HATHAWAY, CONGLOMERATE CREATED BY WARREN BUFFET:
Berkshire Hathaway is indeed the holding company that shelters all the investments of the Oracle of Omaha.
Very followed by the financial markets, the annual letter to the shareholders of Berkshire Hathaway, written by Warren Buffett, is the occasion for the billionaire to expose his vision of the investment, to reveal his latest acquisitions, to give his feelings on the macroeconomic context, or even to pronounce on certain investment practices.
Thus, in 2017, he denounced the exorbitant fees imposed by hedge funds.
In his annual reports, available on the Berkshire Hattaway website, Buffett shares with the public his investment philosophy, with a real effort of education and clarity.
The general assemblies of Berkshire Hathaway, great masses of investment that Buffet describes as “Woodstock of capitalism”, are also the occasion to rediscover the figure of Charlie Munger, vice-president of Berkshire Hathawaywhich evolves in the shadow of Warren Buffett.
However, this accomplice of Buffett actively participated in the building of the Berkshire Hathaway empire. He has in fact largely contributed to finding undervalued stocks of companies with solid fundamentals and enduring competitive advantages.
Charlie Munger attaches great importance to the quality of assets. He is also convinced of the importance of knowing all aspects of a business (business model, products, annual reports, etc.) to better understand economic issues.
WARREN BUFFET’S FAVORITE BOOKS ON THE STOCK EXCHANGE:
Benjamin Graham’s smart investor:
We will obviously start this list with Benjamin Graham’s “Intelligent Investor” that Warren Buffett read at 19 and whose reading will encourage him to join Columbia Business School, in order to learn financial analysis with Graham.
It is one of the most widely read investment books in the world. Warren Buffett considers it to be “by far the best investment book that has ever been written.”
The little book for investing with good sense by John Bogle
Warren Buffet also advises “The little book for investing with common sense” of John Bogle, the founder of the investment fund Vanguard, one of the largest investors in the world. Omaha’s Oracle explains: “Some managers are very good, even if, in the short term, it is difficult to differentiate between luck and talent.
Most managers, on the other hand, know better how to charge large management fees than to achieve large performances. In truth, their main skill is their sales technique. Instead of listening to their mermaid song, investors, young and old, should instead read John Bogle’s The Little Book of Common Sense Investing. “
Investing Between The Lines by LJ Rittenhouse:
Finally, Warren Buffet recently advised “Investing Between the Lines” by LJ Rittenhouse, published in 2013 (and available in English only) in which the author gives the keys to deciphering the financial communication of companies and to extract useful information from it. ‘investment.
With a fortune amounting to more than 61.7 billion dollars in 2015, Warren Buffett is one of the richest men in the world. A character yet unknown to the general public, this article analyzes the place of his investment philosophy in his success and traces the history of this exceptional businessman.
A predisposition for business:
Warren Buffett was born to a wealthy American family in 1930 in Omaha, Nebraska, the city where he still lives today. His father was a broker and was then elected to the House of Representatives. Warren Buffett demonstrated an innate sense of business at a young age.
Encouraged by his father, he made his first financial transaction at the age of 11 by buying three shares of Cities Servicesat $ 38 per share and then sell them for $ 40, making an honest profit. However, the stock price continued to climb until reaching $ 202 a few years later.
This experience teaches Buffett the importance of patience and the long term, values that will largely determine his investment choices thereafter. A few years later, Buffett left to study economics in Washington where he created his first business. The concept is simple: he and his partner set up a pinball machine in a Washington hair salon. The latter allows customers to wait in the waiting room and the profits from the machine were then shared with the salon owner. It is a success.
The young Buffett then reinvests his share of the profits to buy a second pinball machine and repeats the operation in another hair salon, and so on. The business grew rapidly, ensuring him a regular source of income until he sold this business for $ 1,200 (about $ 10,000 in current value). Warren Buffet had just experienced the importance of the return on capital and the value of competent partners.
The intelligent investor:
After studying at the University of Pennsylvania and the University of Nebraska, Warren Buffett discovers the work of Benjamin Graham The Intelligent Investor(1949). This reading is probably one of the most decisive in the construction of the businessman we know today.
The investment theory developed in the book led him to study economics at Columbia University, under the teaching of Graham, who later became his mentor.
After completing his studies, he worked as an analyst in the investment fund founded by Benjamin Graham, Graham-Newman Corp, where he applied and perfected this teaching. In 1956, Buffett returned to his hometown in Omaha where he created Buffett Associates Ltd with the capital contribution of six investors from his close family and friends.
The remuneration of investors and partners is unique: a fixed annual return of 4% is guaranteed by Buffett, the latter filling in his pocket any underperformance of the fund. On the other hand, if the performance exceeds 4%, then 50% of the surplus is transferred to it and the rest of the amount goes to the other partners.
Buffett invests the partnership money with talent, doubling the value of the fund after three years of management. This success led him to devote himself to managing other partnerships, which enabled him to earn his first million dollars in the early 1960s.
He merged these partnerships in 1962, thus creating Buffett Partnerships Ltd valued at more than $72 million at the time.
The birth of an empire:
“It is much better to buy an extraordinary enterprise at an ordinary price than an ordinary enterprise at an extraordinary price. ” Warren Buffett
Graham’s valuation model led Warren Buffett to invest in the Berkshire Hathaway textile company, which he had identified as having great potential despite its low rating. It begins the aggressive acquisition of company shares through its partnership in 1960 to take control of the company in 1967 .
Despite the success of Buffett Partnerships Ltd (with an annual return of 29.5%), its founder liquidated his positions and dissolved the company in 1969 to devote himself fully to the management of Berkshire Hathaway, which he undertook to diversify. Another highlight in Buffett’s life, this decision marked the start of incredible success.
This diversification of activity began in 1967 and has continued to the present day with the acquisition of shares in companies in the insurance (Geico), media (Washington Post), banking, l energy (MidAmerican Energy), communication, reinsurance (General Re), aerospace (Precision Castparts), soft drinks (Coca-Cola), IT (IBM), catering, railways (BNSF), luxury jewelry etc.
The company thus becomes the immense conglomerate that we know today. In 2015, Berkshire is valued at more than $ 354 billion, an average annual return of 21.6% since it was taken over by Buffett and this despite the financial crises.
The biggest deals of Warren Buffett:
Here are some deals from Berkshire Hathaway that have marked the history of the markets, Buffet attaches particular importance to the great diversity of investments in the group’s activity:
Precision Castparts ($ 37 billion in 2015, ongoing)
Metal parts machining company for the aerospace, aviation, industrial turbines, and medical prostheses fields.
Burlington Northern Santa Fe Corp ($ 35.95 billion in 2009)
American railroad company.
Heinz ($ 27.5 billion in 2013)
Multinational agrifood manufacturer of sauces, ready meals, and infant food.
General Re Corp. ($ 16.15 billion in 1998)
Reinsurance company in the fields of damage / civil liability and life/health.
Professional success based on a long-term vision of the economy
“[Warren Buffett shows] almost superhuman patience.” Charlie Munger
Warren Buffett’s financial success for more than half a century owes much less to the luck of the market than to the careful application of the investor’s own principles and values.
“Buy only what you will be perfectly happy to own if the market collapses for ten years.” Warren Buffett
Long-term investment is the key to Buffett’s success. His investment strategy is largely inspired by Benjamin Graham’s theory that the intelligent investor acquires the shares of a listed company below its intrinsic value to own them until the market adopts a fair price.
Thus, Buffett’s strategy consists mainly in the identification and cheap acquisition of high potential companies. This valuation is methodical and rational, like the investor. Such a company must be able to withstand both good and bad economic times, so certain competitive advantages such as an important brand name are valued.
For example, Coca-Cola or Heinz which will outperform in times of crisis due to the media coverage of the names of its brands. On the other hand, the valuation of such a company depends on its contribution to the Berkshire Hathaway conglomerate in terms of synergy, according to the usual principles of M&A.
This long-term philosophy is found in the type of companies sought by Buffett, the latter considers only companies listed for more than 10 years and which he understands perfectly. The latter precept deterred him for a long time from investing in the new technology sector until the acquisition of Precision Castparts announced this summer. Once the pearl has been identified,
The importance of human values:
The long-term success of the Buffett Empire rests in large part on its ability to surround itself with excellent partners. Buffett, therefore, places great importance on the integrity of its employees and the managers of the companies in which its group invests.
Indeed, the acquisition in progress of Precision Castparts stated above was only announced after Warren Buffett had confirmation from the CEO of Precision Castparts that the latter would remain in office once the deal was completed.
This dynamic also applies to his associates, including Charlie Munger, current vice-president of Berkshire Hathaway and longtime friend of Buffett whose latter recognizes his extreme devotion to work. The importance of this human relationship greatly contributes to the cohesion of its industrial empire.
“The more love you give, the more you receive. ” Warren Buffett
When a college student studying in Georgia asked Buffett about his greatest successes and greatest failures, he replied that the success of a life is measured by the love given to you by those around you.
A great philanthropist, Warren Buffett donated over $ 2.8 billion to the Bill and Melinda Gates Foundation. In addition, 85% of his fortune will be donated to charity when he dies. As a director, he takes part in developing the foundation’s vision and strategies aimed at eliminating inequalities in the world.
Warren Buffett: a model always stated and less often followed
A figure of the American dream, the popularity of the businessman believed in the image of the noble values he embodies. However, it is essential not to dissociate the image and success of Buffett from the values on which this success is based: a man may be praised, his investment model is rarely reproduced.
The image of long-term measured investment, as opposed to speculative drifts in the banking system, makes Buffett an example that is rarely followed. As the Financial Times pointed out in March 2015, the operation of Berkshire Hathaway remains little imitated despite the impressive performance of the company.
Patience, long-term commitment and integrity seem to be qualities that are still little recognized in the investment world, despite the tremendous life lesson given by Warren Buffett to short-term finance.