1 Answers: Warren Buffett: How is he so good at Value Investing? Strategy
Question
I have been looking into value investing and see that it all links back to a couple of books written by Benjamin Graham like Securities Analysis and The Intelligent Investor. Also that Warren Buffett studied under Benjamin Graham for many years and it seems anyone who comes into contact with this value investing strategy goes on to become very rich and powerful.
What is it about Warren Buffett’s value investing strategy that works so well?
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Answer ( 1 )
Warren Buffett, who is likely the most renowned financier alive, has been an inspiration to me in my career as a professional stock analyst.
Warren’s career in the investment world has made him the second richest person alive, with a net worth of over 60 billion dollars.
Warren Buffett was born in 1930 in a place called Omaha, located in the state of Nebraska, in the United States.
His father was a stockbroker, and Warren has often credited his initial interest in the markets to his dad.
Warren began his career in finance at an incredibly young age, when he bought three shares of a company called Cities Service at the age of 11.
This first move into business led him to launch a newspaper route at 13.
From there he attended The Wharton School at the University of Pennsylvania as well as the University of Nebraska, where he obtained his undergraduate degree in business administration.
Consequently, he ended up pursuing a Masters in Economics at the prestigious Columbia University in New York.
It is there where he met the celebrated investor, Benjamin Graham.
Graham soon became Warren’s mentor and taught him the concept of value investing, which is the investment strategy Warren Buffett employs to this very day.
In 1954, Graham offered Buffett a job as an analyst at his investment firm Graham-Newman Corporation and by 1956, Buffett was out on his own when he founded Buffett Partnership Limited, a firm that was created with $100,000 in capital reserves.
A few years later, he would end up acquiring the business he is most famous for owning these days, Berkshire Hathaway.
Funnily enough, at the time, Berkshire Hathaway was actually a textile business in severe financial distress.
Buffett took it over and turned it completely around, making it a platform to buy up other firms.
This made Berkshire a holding company.
Through the years, Buffett would acquire and invest in other businesses, which has led to Berkshire becoming the 8th largest public company in the world.
So how did Warren Buffett make such profitable investments?
As mentioned earlier, Benjamin Graham taught Warren the concept of value investing, buying high quality businesses at cheap prices, essentially betting on stocks whose intrinsic price, so whose fair value, is higher than the current market price.
This is much easier said than done.
Finding good investments takes a lot of time and careful analysis.
One of the traits that separates Warren from the average investor is that he is willing to ignore anything that goes on in the stock market in and just focuses on the business itself.
Buffett believes the markets can be emotional, like a human.
One day the market is up the other day its down.
The goal is not to worry when stocks drop and not be overly happy when stocks are up.
In the end, as long as the business is good, you will profit.
Here are some of the traits that the companies he invests in possess:
The first is great management.
A company cannot perform well unless it is managed by experts who act with integrity and are honest with shareholders.
In many cases, good management is what can turn a lousy business into a high growth company.
At the same time, management should be shareholder-oriented and attempt to maximize shareholder value.
There are many ways a company can do so, but these mainly take place in the form of dividends or share buybacks, which is basically when a company buys back its own shares, which increases the stock price.
If management is shareholder-oriented, you can rest assured that it will always do whatever it can to boost the stock price.
Warren looks for businesses he actually understands.
He constantly talks about “staying within your circle of confidence”.
If do not understand what a company does and cannot speak about its operations with a certain level of expertise, you shouldn’t be investing in it.
For example Warren does not invest in technology companies as he does not profoundly understand them.
The company should create a high quality product that entices consumers to keep on purchasing it.
Product is key if aiming for stable and high growth.
In some way shape or form, a business should have an advantage relative to competitors, if not any other rival can come in and snatch up market share.
Last but not least, a business should have a steady revenue stream with predictable and growing earnings.
Earnings is vital if aiming for high returns.
One of the topics Warren Buffett talks about most is his admiration of companies with wide economic moats.
An economic moat, which is a word invented by Warren himself, represents a factor that protects a company from competitors, whether it is a technology unique to the company, a patent or even simply a strong brand name.
One of my favorite Buffett quotes is “in business, I look for economic castles protected by unbreachable moats”.
The purpose of a big moat is to maintain demand for the company’s products over a very long period of time.
So, now lets take a look at some of Buffett’s most profitable investments.
One of Berkshire Hathaway’s largest positions is in Coca Cola, the manufacturer of the popular soft drink.
The position itself is worth over $15 billion dollars.
Think about that.
With that much money could you choose between buying American Airlines or the entirety of the NBA basketball league.
Buffett made his first investment in Coca Cola in 1988, over 28 years ago.
Back then people criticized his move and said that another competitor would enter and steal Coke’s market share.
Well, Coke has continued to be very successful and has generated more than an 800% return for Warren Buffett.
As we talked about just before, Coca Cola is a great example of a company with a wide economic moat.
Coca Cola’s brand name is so strong that it continues to dominate the market for soft drinks.
In addition, Coke is a product Warren Buffett can easily understand.
Finding businesses whose operations you can actually comprehend helps tremendously in figuring out whether they will continue to thrive in the long run.
Another one of Buffett’s profitable positions is in Wells Fargo, an American financial services company.
He began amassing his position in 1990 and has continued to accumulate his investment which now stands at $16 billion.
This means he owns roughly 8.5% of the company whose market capitalization is around 200 billion dollars.
In the last 24 years in which he has owned Wells Fargo, the stock has moved up over 9000%, talk about a great return! Buffett initially got into the business during the savings and loan crisis, which was a financial downturn that impacted large banks.
As I mentioned earlier, unless a crisis has a direct impact on how a business performs, Buffett disregards the movements of the market.
So while others were selling, he was buying.
This is probably one of the best examples which shows why Warren Buffet is regarded as the greatest investor of all time.
To sum things up, its pretty obvious to see why Warren Buffett is such a legend.
His ability to focus on an underlying business instead of being caught up by all the fuss in the markets is admirable, and is something that countless investors attempt to replicate.
What’s most fascinating about Warren Buffett is keenness to educate the next generation of investors.
A large portion of today’s most successful fund managers relies on his conceptions of value investing, which were initially taught to Buffett by Benjamin Graham.
So if we hope to become good investors and maybe even one day become the next Warren Buffett, it is important for us to find high quality businesses that trade at a lower price than their true value.