What you can learn from the Oracle of Omaha
We’ve all heard about Warren Buffett, the 86-year-old multibillionaire known for his friendly demeanor, modest style of living in Omaha, and remarkable ability to create wealth. How does he make so much money? How does Warren and his long-time associate, Charlie Munger, choose their investments?
Berkshire Hathaway has been an overwhelmingly successful company. In the 52 years that Buffett has controlled the company (1965-2016), Berkshire has grown at an average rate of 20.8% annually. During this time period, the S&P 500 has averaged 9.7% each year. Buffett doesn’t just beat the market – he smashes it.
So, what are Buffett’s strategies for growing this wildly successful company?
Probably the most successful investor in history, Buffett is known as the “Oracle of Omaha” for his ability to predict an investment success through evaluating whether to buy or invest in a company.
So what’s his strategy? In a nutshell, Buffett is a value investor. A bargain hunter, he searches for stocks that are valuable but not recognized as being valuable by most other buyers. Thus, he can buy a company when it stock prices are unreasonably low.
However, Buffett isn’t especially interested in how the market treats his new stock. He chooses stocks based on the overall potential of the company to generate earnings. He buys and holds stocks and companies for the long term. His primary concern is how well the company can make money for its shareholders. If the company does well, of course, its share value will also increase.
Buffett outlined one of his beliefs in his most recent Annual Shareholder Letter when he said,
“…you should never forget two things: First, widespread fear is your friend as an investor, because it serves up bargain purchases. Second, personal fear is your enemy. It will also be unwarranted. Investors who avoid high and unnecessary costs and simply sit for an extended period with a collection of large, conservatively-financed American businesses will almost certainly do well.”
Essentially, Buffett waits until a great opportunity presents itself, as opposed to wheeling and dealing all day with his holdings. His investment philosophy reflects his practical, down-to-earth, Nebraska attitude about life in general. He lives in a nice house, not a mansion. He is one of the wealthiest people in the world (over $75 billion dollars), but he doesn’t take a limousine to work.
Can Buffett’s strategy of long-term, value investing work for you?
Buffett’s strategy requires patience, a long-term focus, and buying low (the value investing approach). The first thing to know about long-term, value investing: It’s very difficult to determine whether a company is undervalued by the market, with greater intrinsic worth than most investors see. To make good decisions, you have to be able to analyze a massive amount of financial data, the market for a company’s product, its management, and the future.
Recognizing this difficulty, Buffett advises other investors not to consider themselves “know-it-alls”. He has said, “There is nothing wrong with a ‘know nothing’ investor who realizes it. The problem is when you are a ‘know nothing’ investor but you think you know something.”
As your financial advisor with years of experience and formal training, I am certainly not a “know nothing.” And I realize that there is plenty that I don’t know. That being said, I can provide you with information about how to handle your money. I can help guide you in planning for your future. As Buffett said about wise planning for the future, “Someone’s sitting in the shade today because someone planted a tree long ago.”