The How, When, Where and Why of Warren

The end of an era approaches. Warren Buffet, probably the greatest ever investor, will be retiring at the end of this year.

He is certainly the world’s richest investor, with a net worth around $160 billion, after already giving away much of his fortune. He has been at the helm of Berkshire Hathaway for 60 years, turning it into one of the most valuable companies in the world. Apart from his unparalleled business acumen, his folksy Midwestern demeanour, modest lifestyle, and endless supply of wisdom endeared him to millions around the globe. Known to many as the Oracle of Omaha, referring to his Nebraska hometown, he is something of a cross between a corporate titan, philosopher, storyteller and rockstar. Some 40,000 people flocked to Berkshire Hathaway’s annual shareholder meeting to hear him speak.

Much has been written about his life and work, not just over the past week but in dozens of books and thousands of articles over the years. There is nothing new this newsletter can say about Buffet, but at a time of tremendous global uncertainty, there are a few key take-outs from Buffet’s incredible career: the how, when, where and why.

One and only
There are two important caveats upfront, however. Firstly, there is, and can only be one Warren Buffet, a uniquely gifted and determined individual. Buffet was born in 1930, the son of a US Congressman from Nebraska. As a child he displayed a strong entrepreneurial spirit, getting involved in various small business ventures around the neighbourhood and working part-time jobs. He started investing when still a teenager and his high school yearbook noted that he "likes math; a future stockbroker". He filed his first tax return at 14! The other reason why his success won’t be repeated is because he started his career at a particular moment in history, when markets were much more inefficient, and information was scarce. The entire investment industry has professionalised and expanded over the years and is hyper-competitive today. Information has become abundant, but attention is scarce. His own investment approach has been analysed to the nth degree and copied. The way companies are run has also changed, with a far greater emphasis on shareholder returns from the 1970s onwards.

The second caveat is that, though he started out as a portfolio manager, he cannot be compared with the fund managers whose names you will see on fact sheets today. His success was turbocharged when he acquired Berkshire Hathaway, a struggling textile manufacturer, in 1965 and turned it into a holding company for his investments. It is not a fund, in other words, and unlike a typical fund manager that faces liquidity, size and other mandate constraints, Berkshire enjoys tremendous flexibility (note that none of this should be construed as a recommendation to purchase or sell its shares – past performance is not a guarantee of future performance).

Early on, it purchased insurance companies that generated cash to finance further acquisitions. Insurance companies collect monthly premiums, creating a steady “float” of cash (as Buffet called it) that could be used for acquisitions. Some of these were whole companies, and some were stakes in listed or unlisted firms. The net result is that, over the decades, Berkshire comfortably outperformed the S&P 500. However, there were periods of short-term underperformance. Even the most successful strategies will struggle at times, so this is an important reminder to stick to the plan.

Click here to read more...