Although many investors believe they can beat the market, the majority do not. That is why billionaire investor Warren Buffett often said that he thought many small investors would do better buying into an index-tracking fund than buying individual shares.
That is not true of all investors, though – as Buffett himself proves.
His long-term track record in increasing the per-share value when boss at Berkshire Hathaway thrashed the firm’s benchmark index.
When I say ‘thrashed’ I mean it.
From 1964 to 2024, the S&P 500 index (with dividends reinvested) returned a 39,054% gain. Berkshire’s per-share market value over the same period grew 5,502,284%.
How did he do it?
Taking a long-term approach to investing
Part of the clue is in the timeline.
Warren Buffett is a believer in long-term investing. By buying into what he thought were great companies when their shares sold at attractive prices and then sitting on them for decades, he has often been able to let brilliant companies shine over time, with share price gains often reflecting that.
Sometimes he has sold sooner, but in general Warren Buffett is a powerful illustration of why long-term investing can be so successful.
Forming a clear strategy, then sticking to it
Over his career, Buffett’s investing strategy has changed. But he has always had a strategy and used it to inform his decisions.
A lot of investors do not. They simply buy what they get excited about at a given moment.
That can be costly, for example in market bubbles when they get swept up in irrational euphoria.
By sticking to his approach when others in the market did not do so, Buffett was able to avoid some costly mistakes during and after bubbles.
That matters because beating the market is not just about making good choices, it also requires trying to avoid bad ones.
Building in a margin of safety
That also explains why Warren Buffett decided not to pursue lots of opportunities that looked pretty good.
When investing, he considers what the risks are. Sometimes, of course, it is effectively impossible for an investor to know some risks (as he experienced when there was accounting fraud at Tesco, after which he sold Berkshire’s position in the UK supermarket chain at a big loss).
To try and mitigate risks, though, Warren Buffett always looks for what he calls a ‘margin of safety’ when investing.
A Buffett-style pick I’ve made
I have been applying some Warren Buffett investing principles myself lately, when investing in soupmaker Campbell’s (NASDAQ: CPB).
The company operates in a market with strong, resilient demand as people always need to eat.
That said, with consumers tightening their belts and also reassessing the health impact of processed foods, there is a risk that the company’s sales could keep falling, as they have done lately.
That risk seems more than factored into the share price, though. At 10 times earnings, Campbell’s shares look like a bargain to me from a long-term perspective.
With strong brands, a proven business model, and lots of cash flow generation potential, I see this as a share to buy and hold for my portfolio.
On top of that, the company – that has grown its dividend per share annually for decades – offers a juicy dividend yield of 7.4%.
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Christopher Ruane owns shares in Campbell’s.
