Ever wondered what the fuss is about investor Warren Buffett? If so, a look at his investing track record would explain it.
Even if you are very familiar with the so-called ‘Sage of Omaha’, a look at that investing track record can still be instructive. After all, $100 invested in his company Berkshire Hathaway in 1965 had grown to a market value of $5,502,284 by the end of 2024. How did Buffett do it?
Taking the long-term approach
The first thing to note is the timescale involved: close to six decades. Buffett is a believer in long-term investing. Indeed, he has previously said that his preferred holding time for an investment is “forever“.
That is not from laziness or sentimentality. A good business ought to be able to demonstrate its value over the long term, compounding its value.
A few brilliant investments, on a substantial scale
Some investors aim to cover the waterfront, putting relatively small sums into lots of different shares. That does not only mean they may end up with quite a few average performers (or worse). Crucially, it also means that when they do strike gold, a relatively small investment may mean the overall benefit for their portfolio is limited.
Buffett reckons that most of his success has been driven by five to 10 investments. As he put it: “You don’t… need to own a lot of things in order to get rich.”
Know what you know and stick to it
Most of those investments have been in well-defined areas such as insurance, financial services, consumer goods and industrial companies. For Buffett, sticking to his circle of competence has always been an important mantra when investing.
To do that actually requires two things: sticking to your circle of competence and identifying what that circle of competence actually is at a given time (as it can evolve).
Valuation’s critically important
Some investors lose money because they only focus on buying into quality businesses.
What is wrong with that, you may ask? Even a quality business can be overpriced. That is why Buffett typically talks of investing in great businesses at an attractive price.
Take Coca-Cola (NYSE: KO) as an example. He invested heavily in the soft drinks giant in the 1980s and 1990s. But Berkshire under his leadership did not buy another share for over three decades. Nor did it sell one.
The firm did however, benefit handsomely from growing dividend streams. Coca-Cola has increased its payout per share annually for over half a century.
Coca-Cola’s attraction to me as an investor today reflects some of what Buffett appreciates about it. The company has strong brands, a large global customer base, proprietary formulations and a highly developed distribution network.
But I do not like the price, currently 27 times earnings. That is over twice what I recently paid for other US consumer goods companies Campbell’s and McCormick that have similar strengths.
Ingredient price inflation is a threat to Coca-Cola’s profitability. An ongoing shift away from sugary drinks in developed markets continues to pose a long-term risk to profits.
While not buying Coca-Cola shares, I am nonetheless applying some lessons from Buffett to hunt bargains in today’s market.
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Christopher Ruane owns shares in Campbell’s and McCormick.
