What is it that’s made ace investor Warren Buffett so successful for so long? The answer is actually quite simple, but first let’s see just how well he’s done.
If you’d bought a single ‘A’ share in Mr Buffett’s Berkshire Hathaway investment company back in 1980, you’d have had to pay around $275 for it, but how much would it be worth today?
Hang on to your hat while I tell that the ‘A’ shares are now changing hands at $254,900 apiece. If you can’t afford to invest in ‘A’ shares, don’t worry, you can buy a small slice of one in the form of a ‘B’ share, currently priced at $170.
None of that success has been down to the kind of get-rich-quick, high-risk shares that many people seem to crave. No, those are far too risky, and would stand a good chance of violating Mr Buffett’s rule number one — don’t lose money.
So what Warren Buffett has achieved has not been through spotting those hidden overnight multi-baggers and pocketing massive short-term returns. No, he’s made it by beating the market by modest margins most years, and doing so for decades.
Berkshire Hathaway started out as a couple of textile mills, which the fledgling guru bought-into and later came to control. One of the first investments he then made was the purchase of an insurance company. Warren Buffett likes insurance companies, as they generate lots of cash and their float can be used for further investments.
That hints at the key reason for his success. He buys-into what he sees as the very best cash-generative companies, which produce enough profits to pay out attractive dividends, and then he re-invests those dividends in more shares of the same kinds of companies.
The other key is to only buy companies that you would want to hold for a very long time. He once said: “If you aren’t willing to own a stock for 10 years, don’t even think about owning it for 10 minutes“.
There, I told you it was simple.
That famous long-term buy-and-hold (LTBH) mantra might make you think think you actually should never sell, but that is the biggest misunderstanding of the strategy that I come across — it doesn’t mean LTBH, whatever the outcome.
Mr Buffett has, in fact, quite often bought and sold over periods far less than those 10 years, as he did with Tesco when he saw what was going wrong. The thing about seeking companies you want to hold forever is that they can change, even if you don’t.
So if a company you think you want to hold forever today goes bad in five years’ time, it would be madness to keep it — if an investment fails to live up to your expectations, then you should simply dump it and walk away.
The bottom line really is those dividends, so why does Berkshire Hathaway not pay any? Well, a company should hand out cash to shareholders when it can’t get a better return for them by reinvesting it in its business — and that’s the way most mature blue-chip firms work.
But Warren Buffett has consistently shown he can generate better returns, and you could too by following a deceptively simple long-term strategy.
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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended Berkshire Hathaway (B shares). We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.