Warren Buffett’s company Berkshire Hathaway has offered returns that are nothing short of sensational. If I’d invested £2,155 in the firm’s shares 40 years ago, I’d now have £1m.
Reaching a million from such a small sum is impressive, but is it as good as it looks at first glance? Also, and perhaps more importantly, what kind of strategy was used to multiply that initial investment so much? Let’s answer both questions.
First, we’re dealing with a 40-year timeframe here, so let’s address inflation. Over so many decades, I might expect inflation to make the near 500 times returns look a little less outrageous.
Using UK inflation figures, the £2,155 sum in 1983 would be worth £6,967 today. That still looks microscopic compared to the million-pound endpoint. So, inflation has an effect here, but not an overwhelming one.
We should consider other investments too. Housing has been the obvious go-to for building sizeable net worth. Owning property has been lucrative, but more so than Berkshire Hathaway shares?
Well, the average house price in the UK is up around 11 times since 1983. I’d expect my £2,155 to have made it to around £23k. So the answer is no. Even buying a house in the early 1980s can’t hold a candle to the return I’d have got with Buffett.
Miles away
Perhaps other stocks are a better comparison. After all, it’s no secret there’s money to be made in the stock market. Is the way Buffett invests truly extraordinary? Or is it simply a run-of-the-mill fortune made from stocks and shares?
Well, if we go with FTSE 100 average returns, the £2,155 would turn into £17,349. If we go with the S&P 500 – US stocks being more lucrative lately – the same amount would turn into £37,603.
Those are both decent chunks of change, sure, but still miles away from what I’d have from an investment in Berkshire Hathaway.
The results are clearly fantastic, but I will say, before I get into how Buffett goes about investing, they aren’t typical. We’re talking about a man who many call the best investor of all time, someone who invested his way up to being a billionaire many times over. There’s perhaps a touch of ‘survivorship bias’ here that ignores investors who get mediocre returns or even lose money.
But I think it’s worth looking at how he made his billions all the same.
How he does it
His strategy is simple and comes from the value investing school, although he does put his own spin on things. At its simplest, he sees the stock market as a place to own a piece of a company.
If he likes a company, Coca-Cola say, and if he enjoys the products, likes the management, is happy with its reports, he’ll buy in. A simple process, if not an easy one. He still holds $23bn of Coca-Cola stock, by the way.
I look at the investment style he uses, and the outrageous returns he’s made, as inspiration. If the right strategy can turn £2,155 into a million pounds, then it’ll help me remember to stay the course and continue investing myself. I don’t expect results like that, but even a fraction of them would be just the ticket.
