Chippenham Wiltshire -- In his opening statement in his 1999 letter to shareholders Warren Buffett said: "Over the last 35 years (that is, since present management took over) per-share book value has grown from $19 to $37,987, a rate of 24.0% compounded annually."You have to admit it, to return 24% compound for 35 years is amazing -- and remember, this is the intrinsic value of the business. The share price of Berkshire Hathaway(NYSE: BRK.A) has done even better. When he took control, the share price was $18 a share; it is currently worth $57,700 a share.
Thanks to his ability to spot undervalued companies and purchase them on the cheap, the Sage of Omaha has made many people very wealthy over the course of his career. He has made himself even wealthier; Buffett owns 38% of Berkshire Hathaway, which gives him a net worth of more than $33 billion, which makes him one of the wealthiest people in the world. According to Forbes magazine he is currently the third richest person in the world, behind Bill Gates of Microsoft(Nasdaq: MSFT) and Larry Ellison of Oracle(Nasdaq: ORCL).
We would all love to replicate what Warren Buffett had done, but it simply is not possible. None of us have the abilities and skills of Warren Buffett, and none of us have the opportunities that he had when he started investing 50 years ago.
So who is Warren Buffett?
Warren Edward Buffett was born in Omaha in 1930, the son of Howard Buffett, a stockbroker and Republican congressman. At the age of 11 he began marking the board at his father's brokerage; and in the same year, he bought his first stock, three shares of Cities Service Preferred at $38 a share. The price immediately dropped to $27, but then recovered to $40, at which point the young Buffett sold -- making a $5 profit, but missing the company's subsequent rise to $200 a share.
At the age of 14, with savings from his two paper routes, he spent $1,200 on 40 acres of Nebraska farmland, which he leased to a tenant farmer. Buffett really caught the investment bug when he was a the University of Nebraska, and read Benjamin Graham's The Intelligent Investor. The bible of the value investors, Graham's book advised investors to ignore the trends that sweep Wall Street and instead hunt for stocks that trade far below their actual value. After graduating, Buffett moved to New York to study with Graham at Columbia University. After getting a masters degree in economics, he began working for his mentor Benjamin Graham.
Buffett learnt a lot at the feet of Graham, but felt constrained by his strict rules. He began to wonder if it made as much sense to buy good businesses at a fair price, rather than dying businesses on the cheap. So in 1957, he returned to Omaha and started his first investment partnership. A group of Omaha investors handed him $25,000 each. Buffett put in $100 of his own money, appointed himself general partner and began to purchase stocks. His stated goal at the time was to beat the Dow Jones Industrial Average by an average of 10% a year. When the partnership dissolved in 1969, Buffett's investments had grown at a compound rate of 29.5%, compared to just 7.4% for the Dow.
In 1962, Buffett began purchasing stock in a struggling textile mill called Berkshire Hathaway, a value share. But the U.S. textile industry continued to wither in the face of foreign competition, and so Buffett began redeploying Berkshire's capital into an array of other businesses, most importantly insurance. Insurance is a perfect business for Buffett; policyholders pay premiums up front and claims are only paid out later, providing insurers with a steady stream of low-cost cash to invest in the market with, and Berkshire was generating millions of dollars of it. The insurance-generated cash came along just as the financial markets went into their deepest decline since the 1930s, and this enabled Buffett to buy significant stakes in companies at bargain prices.
What is Warren Buffett's Investment Style?
In his book The Warren Buffett Portfolio Robert Hagstrom says that Buffett's secret is focus. "Choose a few stocks that are likely to produce above-average returns over the long haul, concentrate the bulk of your investments in those stocks, and have the fortitude to hold steady." Our own Qualiport portfolio tries to recreate this style.
But is this really the Warren Buffett way? According to the company's annual report, Berkshire Hathaway has 25 subsidiaries, but you are not provided with a detailed listing of investments. The value of the subsidiaries is probably about half of the total value of the stock market investments -- how many private investors can actually buy 100% of the companies that we are interested in investing in?
Buffett looks for great companies with consistent earnings growth and then waits until they are selling at bargain prices. He chooses each company with loving care and only buys when he feels that he will hold it forever.
What would a young Warren Buffett do?
If Warren Buffett was an aspiring young twentysomething, do you think he would look at his ageing self and think: "Hey, let's try and replicate that exactly"? No, he would think: "Let's learn from the old man, but let's do it my own way."
People think that they know how Warren Buffett selects stocks. The fact is that they are wrong. They have no real idea of how he selects the companies he invests in. Many people think that he is simply a value investor -- he is not! When he bought Coca-Cola (NYSE: KO) in 1988 it was trading on a price to earnings ratio (P/E) of 13 times expected 1989 earnings, about 15% higher than the market average. Coca-Cola wouldn't have passed Ben Graham's value criteria. Because of its earning power, Buffett couldn't compute Coca-Cola's value, but he could see it. He used his investing "nose". At the time, Coca-Cola was viewed as being very expensive, but Buffett could see the potential of this super-growth stock. Coca-Cola stock now represents about 20% of Berkshire Hathaway's net worth.
Buffett generally does not give interviews. All of the books that have been written about him have been written without his input. The writers have almost no real knowledge of what makes the great man tick, and thinking that you can learn about him, or even worse thinking that you can replicate his style after reading a book, is a great mistake -- you can't.
Maybe Buffett was simply lucky?
To put all of Warren Buffett's success down to luck would be wrong, but he has been lucky. He was lucky that he was born at the start of the 20th century; he was lucky to have been investing through a period when the American stock markets boomed and boomed. He was lucky to be born in America, and to be investing primarily in American companies, companies that over the years have created a truly international presence. He was luck to have the cash generated from the insurance companies to invest in the market during the 'crash' of the 1970's, he was luck that he bough Coca Cola when he did. Warren Buffett was lucky that in 1957, he was able to persuade the group of Omaha investors handed him $25,000 each. Buffett only had to put in $100 of his own money, with an investment of only $100 he was hardly taking a massive risk!
OK, Warren Buffett has quite often made his own luck, be we cannot rely on being as lucky as Warren Buffett in the future.
Buffett is not perfect
To many people seem to be willing to revere the man, almost idolise him, and seem to think that he can do no wrong. But Buffett has made his fair share of mistakes (although not as often as many of us mere mortals do). His stake in USAir is one recent example. So you really must not simply try to blindly follow what he is doing. Berkshire Hathaway is still very much concentrated on general insurance; is this a good move? Should we all be buying into insurance companies? Who knows? Only time will tell, but blindly following Buffett, for example, into insurance company shares would be a big mistake. Buffett does not invest in insurance company shares; he buys the company outright, and uses the cash generated to invest in the stock market.
Buffett doesn't invest in technology. This isn't because there are no technology companies worth buying, it's because he says it's outside his "circle of competence". If you understand the technology, if you feel comfortable with it, you should not stay out just because he does. Remember, Buffett makes almost no use of computers, but you do! If you are reading this you are using the Internet, and so you know what he's missing; build your own stock investing strategy around using the Internet to improve your stock selection skills, and don't be a technophobe like him.
Can you copy Buffett?
Since he has never explicitly stated his strategy, since he never gives lectures on the Buffett way of investing, since he has never written a book, Buffett's investment style has had to be pieced together by other people. These people don't have any special access to Buffett; he does not sit down and give them the benefit of his wisdom, and they have tried to deduce what the Warren Buffett Way actually is from anecdotal evidence. Buffett's investment style is not easily quantified. Buffett is a master stock picker; this ability is something that most of us don't have, and it is not something that can be learned or copied.
Developing your own style will be safer than placing blind faith in what you believe to be his system. Its no good trying to copy Buffett's stock picking techniques, as it's difficult to learn from him. He does not tell you exactly how he does it. His only writings are in the Berkshire Hathaway annual reports, and while these are well worth reading as they give you a glimpse of the real man, I don't think they are greatly instructive on how you should invest. You are not Buffett, and so don't try to pretend that you are.
What you should try to do is learn from Buffett's stock picking techniques, as you should try and learn from all other investors. Take what you think is best and integrate some of it into your own strategy. The important thing is to be your own person, to realise that you can't copy Buffett. It is also important to realise that you can be your own Fool and take control for yourself, and that you can and must develop your own investing strategy that builds on your own strengths and abilities.
So in conclusion: no, you can't copy Warren Buffett.
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