Multi-billionaire investor Warren Buffett is a living legend. And he’s earned his revered place in the global investing community because of his record of success.
We can check out his performance by reading his latest letter to the shareholders of his investment vehicle, Berkshire Hathaway. It’s within Berkshire that Buffett works his financial magic. And he does so by buying and owning businesses outright, or stocks of listed companies.
Warren Buffett’s long-term performance
The 2021 letter says the per-share market value of Berkshire Hathaway produced a compounded annual gain of just over 20% a year between 1965 and 2021. And Buffett reckons that performance compares to annualised total returns from America’s S&P 500 index over the same period of 10.5%.
It’s a remarkable achievement. Buffett has doubled the returns of the ‘market’ for a period of more than five decades. And that’s despite the many recessions, bear markets, setbacks, crises and other negative events that affected businesses and stocks along the way. So how did he do it?
Buffett’s authorised biography by Alice Schroeder reveals strong clues to the ingredients of his recipe for success. It’s called The Snowball and is well worth a read.
One of the main things driving his achievements, I reckon, is his love of investing. He enjoys the process of picking businesses in which to allocate capital. And the fact that he still turns up for work most days now — at the age of 91 — underlines the point.
To become great at any pursuit in life, it helps a lot if we love doing it. And I’ve found the more I dig into something, the more love it.
Concentration and compounding
Another tip I’ve taken from Buffett is to keep going. One of the ‘secrets’ of his success is his focus on the process of compounding his returns. Those annualised gains of around 20% may not sound that impressive. But when we compound those kinds of returns for decades, the value of a portfolio skyrockets.
And one of the key variables in the process of compounding is the length of time we keep it up. Huge absolute returns can arrive in the latter years of a period of compounding compared to the earlier years. And that’s why Buffett moved from multi-millionaire status to multi-billionaire status.
Finally, Buffett has always taken a concentrated approach to portfolio construction. You won’t find his portfolio reading like a list in a directory of stocks. Instead, he operates more like a market sniper.
He tends to focus on one stock or business opportunity at a time. And after carrying out thorough due diligence and research, he buys a meaningful quantity of each stock or business if the quality and valuation are right.
I’m aiming to get rich and retire early by following Buffett’s methods. However, it’s worth me remembering that all stocks carry risks as well as positive potential. Nevertheless, I’m in the game for the long haul!
