Warren Buffett is one of the world’s wealthiest men, and he’s considered to be one of the best investors of all time. Neil Woodford, is one of the UK’s most respected fund managers and has achieved outstanding returns for his investments over his career.
However, despite these two investors’ similarities, they both follow very different strategies, and I believe one is vastly superior to the other.
Two different strategies
There’s one major factor that separates these two investors, which drives the different investment styles. Warren Buffett has permanent capital, while Neil Woodford, operating an open-ended fund, does not have the same luxury.
Buffett’s permanent capital base comes from his holding company Berkshire Hathaway. He is the largest shareholder so does not have to worry about impressing anyone else when he makes his investments.
On the other hand, Neil Woodford has to impress his fund owners, or they will withdraw capital. For example, after a spate of lousy performance recently, insurer Aviva pulled his funds from its offering to investors.
Put simply, the lack of permanent capital means that Woodford has to try his best to outperform the market. To accomplish this, he has taken stakes in high-risk, high-reward early-stage growth companies in both the public and private markets.
What’s more, unlike Buffett who can sit by and wait for the perfect opportunity, Woodford is under pressure to be fully invested. That’s why Buffett is sitting on around $100bn of cash right now, waiting for the perfect opportunity, while Woodford is nursing his wounds after investing in a host of companies that did not meet expectations. Buffett can afford to underperform for a few years without facing investor wrath.
Woodford also targets the best dividend stocks, whereas Buffett is more attracted to businesses with a substantial competitive advantage and room for growth. Dividend income is not a priority for Buffett.
Buffett’s style is the one to follow
Luckily, almost all private investors do not face the same pressures as Woodford as they can afford to sit on the sidelines and wait for the perfect opportunity to buy at the right price without being questioned.
So for most investors, Warren Buffett’s style is more suitable. There is no need to invest in rewarding-but-risky companies where the risk of total capital loss is high (even if you can make multiples of the current price if everything goes to plan). Such a strategy is research intensive and can be costly when you’re playing with your own money.
Buffett’s strategy of buying good companies at attractive prices and holding onto them is, in my opinion, a much more suitable approach for the average investor.
Buy and forget
Buffett is famous for his hands-off investment style. He rarely makes changes to his portfolio, which is highly concentrated in a few stocks and likes to sit on the best investments for years.
Overall, for the non-professional investor, this is much better way to go. There’s no desire to continually find new growth stocks and rebalance the portfolio to find the best bets. All you need to do is sit back and watch your money grow.
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Rupert Hargreaves owns no share mentioned. The Motley Fool UK owns shares of and has recommended Berkshire Hathaway (B shares). Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.