A lot of investors bandy the name Warren Buffett about.
Partly that is because he is well-known for explaining his approach to investing in clear terms.
But partly it is because Buffett is so good at it.
Next month we should get the latest shareholders’ letter from Berkshire Hathaway summarising last year’s performance, the final one with Buffett at the helm.
But we already know that, in the 60 years from 1964 to 2024, Berkshire’s per-share market value under Warren Buffett’s leadership grew an incredible 5,502,284%.
To put that in context, someone investing $1,000 in Berkshire when Warren Buffett took over would have been sitting on a holding worth around $55bn 60 years later.
How did Buffett manage it?
Buffett had an opinion about what investing is
Lots of people invest – some very well – without really having a point of view on what investing actually is.
Maybe they just put money into shares of companies they like, hoping they will go up in price. As that approach can work, there may seem to be no need for a point of view about what investing actually is.
But Warren Buffett’s success came from his willingness to learn from experience and evolve a thought-out approach over time.
After trying a few investment styles, he landed on the idea that he was buying stakes in companies.
He only wanted to buy stakes in what he thought were great companies. He would aim to do so only at an attractive price (note that that is not necessarily a cheap price) and then hold for the long term.
A focus on quality and long-term investment
Why does this matter?
Having a firm, consistent point of view helped shape what Warren Buffett did and also helped him stay the course.
As an example, consider Berkshire’s holding in American Express (NYSE: AXP).
In the 1960s, the company’s share price was marked down sharply as the market learned of a fraud involving an Amex subsidiary issuing warehouse receipts for non-existent vegetable oils.
Buffett realised that, as American Express was the unknowing victim, not perpetrator, of the fraud and it was not core to Amex’s business, the long-term impact would likely be minimal. American Express had a strong, proven business with a powerful brand and a large customer base.
Warren Buffett’s reasoning was that its underlying value had not really changed. Even allowing for other risks like some cardholders not paying their bills, Buffett scented an opportunity when others were scared.
He calls that “being greedy when others are fearful“.
That turned out to be the correct call. Berkshire bought into a great business at an attractive price – and has hung onto the shares in the decades since.
Compounding gains
Buffett’s remarkable long-term gains have come because Berkshire has kept reinvesting gains.
That is known as compounding.
Over the course of six decades it can be remarkably powerful. The 5,502,284% gain I mentioned above was ‘just’ 19.9% annually.
That is impressive – but does not sound incredible. By compounding at that rate for decades, though, Buffett delivered really big gains for shareholders.
