Photo Credit: Mark Hirshey, Wikipedia Creative Commons
By Jason Zweig | 11:00 am ET May 1, 2015
What makes Warren Buffett Warren Buffett?
That question will dominate this weekend’s annual meeting of Berkshire Hathaway, on the 50th anniversary of Mr. Buffett’s takeover of the company. His letter to shareholders in this year’s annual report offered Mr. Buffett’s thoughts—and those of Vice Chairman Charles T. Munger—on how an introverted and unheralded investor from Omaha turned a dying textile maker in New Bedford, Mass., into the fourth-largest public company in the U.S. by annual revenue.
Some of the keys to Mr. Buffett’s success as an investor can be emulated by almost anyone; others, by almost no one. How can you tell which is which? You need to understand what exactly it is that he does.
Mr. Buffett has always organized himself with a sole focus on investing sensibly, without having to answer to impatient clients or obsessing about what other investors are doing.
“It’s always been easier for me because I control the company,” Mr. Buffett told me this past week. “So I could play my own game, and that’s certainly unusual among older companies [that manage money].”
He added, “I may have changed the game a little since I met Charlie, but I’ve always played my own game.”
That game can best be described as the pursuit of unchanging goals through ever-changing means.
Mr. Buffett, who is 84 years old, has never wavered in the principles he learned from his mentor, Benjamin Graham: Stocks are ownership stakes in businesses, not pieces of paper or blips on an electronic ticker; their market prices often are driven by the mood swings of investors rather than by the value of the underlying businesses; and investing is worthwhile only when value exceeds price by an amount great enough to create a “margin of safety.”
Nor has he ever changed his views on three of the most powerful weapons in the investing arsenal: cash, emotion and information.
Unlike most money managers, who hate cash for impairing performance during bull markets, Mr. Buffett loves it. As he wrote in his 2010 letter, cash equips Berkshire “both financially and emotionally to play offense while others scramble for survival.”
Mr. Buffett isn’t unemotional but inversely emotional: alarmed by other people’s greed and greedy to capitalize on their fear. “One of the hardest things for most investors is to sit by and watch other people make money,” says Howard Marks, co-chairman of Los Angeles-based Oaktree Capital Management, who has known Mr. Buffett for many years. “But that doesn’t bother Warren at all when the opportunities are outside his sphere.”
Long ago Mr. Buffett turned himself into an information hub, sponging up data, storing it in his prodigious memory and developing a network of contacts brimming with good ideas. “Warren has the ability to figure out which things are important in a whole narrative and to ignore everything else,” Mr. Marks says. “He’s also extraordinarily good at knowing what he’s good at and what he’s not, and staying away from the latter.”
But Mr. Buffett implements these principles today with very different means than he used in decades past.
Look back at the letters Mr. Buffett wrote his partners in the 1950s and 1960s, before he shut down his investment partnerships and turned Berkshire Hathaway into his main vehicle. Then, he concentrated on three strategies: what he called “generally undervalued securities,” or cheap stocks he didn’t control; “workouts,” opportunities to arbitrage, or capture pricing differentials, in mergers and other deals; and “control situations,” or companies in which he owned a large or majority stake.
In those days Mr. Buffett could bet big on tiny, almost laughably obscure companies at great prices. At various points his partnerships had 21% of their total assets in Dempster Mill Manufacturing, a producer of farm implements and irrigation equipment based in Beatrice, Neb., and 35% in Sanborn Map, a New York-based cartography company whose investment portfolio alone was worth more than its stock price.
From 1957 through 1968, those strategies combined to produce an average return of 25.3% annually, compared with 10.5% for the S&P 500.
But as Berkshire grew into a behemoth, investing in such plankton-sized bargains became pointless.
So, nudged by Mr. Munger, Mr. Buffett migrated toward great companies at good prices: Coca-Cola, Wal-Mart Stores, Wells Fargo.
And Mr. Buffett toggled back and forth between the stock market and the private, or what he calls the “negotiated,” market, in which he can use Berkshire’s billions to buy companies outright. Taking full advantage of Berkshire’s status, he has struck sweetheart deals, as he did during the financial crisis when he took multibillion-dollar stakes in Goldman Sachs Group and General Electric at distressed prices.
Another key to Mr. Buffett’s skill as an investor is his zest for it, even as an octogenarian. He earns $100,000 in annual salary and says he gives half of it back to the company. Nevertheless, he told me this week, “I consider it the most richly compensated job in the history of the world, measured by the amount of fun I’ve had. And it’s been even more fun because I’ve had Charlie to work with.”
Too many investors try to mimic Mr. Buffett by copycatting his stock picks and parsing every syllable he says and writes. They miss the forest for the trees. To learn from Mr. Buffett, concentrate your energies on figuring out what you stand for as an investor, who you are, what you know and what you don’t. Be inflexible on those principles. Then change and learn and grow relentlessly as you put them into practice.
Source: The Wall Street Journal
Roger Lowenstein, Buffett: The Making of an American Capitalist
Alice Schroeder, The Snowball: Warren Buffett and the Business of Life
Chapter 20, “‘Margin of Safety’ as the Central Concept of Investment,” in Benjamin Graham, The Intelligent Investor