With Warren Buffett having now stepped back from his daily executive role at Berkshire Hathaway, we have witnessed the end of an era.
What an era it was!
The compounded annual gain in Berkshire’s per-share market value over the period 1965-2024 was 19.9%.
That might not sound like a very high bar to beat. After all, lots of shares gain more than 20% in value each year.
In fact, though, beating that number is harder than it seems. Doing well in one or two good years can seem deceptively simple. But Warren Buffett’s 19.9% compounded annual gain covered the course of decades, including some very tough years in the stock market, as well as good ones.
But, as Buffett himself has acknowledged, small investors do have an advantage over him. Outperformance is easier when dealing with modest sums compared to when one is investing billions, necessarily reducing the pool of available opportunities.
1. Hunt for long-term business winners
Part of Warren Buffett’s success is down to a change he made in his early career.
He had started by looking at one-off bargains. Borrowing from Ben Graham, he described this as “cigar butt investing” as there may be one good puff still left in the share.
For example, a struggling but cheap company might be taken over at a premium to its previous share price.
Buffett changed his approach to looking for brilliant businesses he felt could compound value over time. For example, Coca-Cola (NYSE: KO) has spent decades building instantly recognisable brands that help drive sales year after year, even if advertising spending goes down.
2. Be highly disciplined about choices
The stock market often throws up quite good opportunities.
But it more rarely throws up great opportunities.
Buffett reckons investors should be laser-focussed on waiting for brilliant opportunities and then filling their boots, even if that means waiting for years on end without doing anything.
3. Stick to what you understand
There are a couple of key elements to successful investing, according to Warren Buffett: buying into great businesses is one and doing so only at an attractive price is another.
Other factors can still get in the way, of course. (That is one reason a smart investor keeps their portfolio diversified across different shares).
But it is crucial, in Buffett’s view, to know what you are investing in and be able to determine whether the price seems attractive.
Doing that is already difficult. But it is much harder if you do not understand the businesses in which you invest. Buffett always aimed to stick to what he called his “circle of competence”.
4. Look for compelling business models
One of the reasons Warren Buffett invested in Coca-Cola and still holds the shares decades later is because of its business model.
Selling syrup made with a proprietary recipe to bottlers is a simple business model. It also lets Coca-Cola focus on a key part of its value chain, leaving the potentially lower margin business of distribution to the bottlers.
Can things go wrong? Sure.
As Buffett’s investment in Kraft Heinz has proved, shifting consumer tastes are bad news for sales of highly processed foods. Sugary drinks sales volumes could also fall over time.
Still, Coca-Cola has a cash generative, proven, and powerful yet simple business model.
