Known as the “Oracle of Omaha,” Warren Buffett is one of the most successful investors of all time and his track record is unparalleled. From 1965 to 2017, Berkshire Hathaway’s share price generated a 20.9% annual return, trouncing the S&P 500’s 9.9% return.
With that, we would like to share 5 things that make Warren Buffett one of the best investors of our time.
#1 Warren Buffett controls his emotions well
One of his famous quotes of how he takes advantage of the market (and not be a victim) is as follows:
“Be fearful when others are greedy and greedy when others are fearful.”
Time and again, Buffett has used this philosophy to pounce on opportunities. The most defining moment in his career was the huge bet on American Express (AXP).
In the 1960s, the share price of American Express plunged 50% when it was discovered that the collateral it had used to secure millions of dollars of warehouse receipts did not exist. The collateral in question was salad oil and it turns out that commodities trader Anthony De Angelis had faked the inventory levels by filling his tankers with water.
However, Buffett went to do some scuttle-butt and realized that the the company’s competitive advantage would not be materially impacted by the event, and he subsequently invested 40% of his partnership’s money in the stock. Over the course of five years, Amex’s value soared 500%.
#2 Warren Buffett sticks to his circle of competence
Buffett will stick to his strategy regardless of what the crowd is doing. In the internet bubble he was written off as a has been. An old guy who could not understand the great new world. Internet stocks were roaring and he didn’t buy one of them. The world had passed Buffett by.
After 2000 and the dotcom crash Buffett was the last guy standing. His Berkshire Hathaway had once again outperformed over the beginning and ending period of the dotcom era.
What Warren does: Buffett has spent his career developing an intimate knowledge of the finance and consumer goods industries. This gives him an edge when investing in these sectors.
Berkshire’s portfolio reflects the fact that Buffett largely sticks to these core competencies — the company’s top five holdings include Wells Fargo, Coca-Cola (NYSE:KO), American Express (NYSE:AXP), and Munich Re.
#3 Buffett knows that you’ve got it easier than him
What Warren doesn’t do: Buffett doesn’t spend much time investing in small companies. With a market capitalization of more than $300 billion, investing in small companies won’t move the needle for Berkshire.
However, Buffett knows that some of the best returns are available in smaller companies and to investors with far less capital than Berkshire. Here’s what Buffett’s said:
It’s a huge structural advantage not to have a lot of money. I think I could make you 50% a year on $1 million. No, I know I could. I guarantee that.
What you can do: Think small! In terms of growth opportunity, it’s not hard to realize that a $500 million company has a lot more potential upside than a $100 billion company.
That doesn’t mean small companies will automatically succeed — many, in fact, fail miserably. But a well-chosen small company can obliterate the returns of a plodding large cap.
#4 Buffett doesn’t pay attention to economic forecasts.
In a video clip under CNBC’s Warren Buffett Archive, the billionaire investor explained why he does not give much credence to financial market predictions from economists.
“I don’t pay any attention to what economists say, frankly,” Buffett said some time back.
“Well, think about it. You have all these economists with 160 IQs that spend their life studying it, can you name me one super-wealthy economist that’s ever made money out of securities? No.”
The Oracle of Omaha cited the example of the economist John Maynard Keynes, who went through periods of heavy losses trading currencies in the 1920s and 1930s and stumbled while speculating on stocks.
Buffett said Keynes faltered using top-down economic forecasts such as credit cycle predictions.
“If you look at the whole history of [economists], they don’t make a lot of money buying and selling stocks, but people who buy and sell stocks listen to them. I have a little trouble with that,” the investor added.
He does not make macro calls. He does not try to predict what the economy will do or the market over the short term. He does not care.
He said if he spends 5 minutes a year on economics that was probably 5 minutes too much. So save your time and ignore the noise on CNBC about all the politics or economics.
#5 Buffett owns up to his mistakes
Find companies that have wide economic moats. A sustainable advantage over competition. This means strong brands, patents, process or some other moat around the business making it hard for competitors to attack
Buffett invests in companies with solid and reputable management. This is one of his very important rules although I have also heard him say try to invest in a company so strong and good that a monkey could be CEO and run it. Because someday it may have an incompetent CEO where a monkey might be favorable
Buffett also started buying entire companies vs just stocks in companies. Stock is a partial ownership slice of a business but as time went on he preferred to purchase entire companies when possible.