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Invest like the best: Warren Buffett

Welcome to the first in a series of blogs to profile well-known investors’ strategies, because we believe that it’s important to learn from others. We thought we’d start with the masters: Warren Buffett, Nassim Taleb, Seth Klarman, Geraldine Weiss, Muriel Siebert, and many more.

We’re beginning with the Oracle of Omaha, the inimitable Warren Buffett.  

Age

88

Age when started investing

11

Bio

Yes, you’ve heard a lot about him, but Buffett’s bio is rather surprising! He’s probably America’s best-known investor and the chairman and CEO of Berkshire Hathaway, but he’s also a philanthropist who is generous with his gains. Considered one of the most successful investors in the world, Buffett has a net worth of US$84.9 billion making him the third-wealthiest person in the world.

“Rule No. 1: Never lose money. Rule No. 2: Never forget rule No.1.”

Born in Omaha, Nebraska, Buffett studied at the Wharton School of the University of Pennsylvania in 1947 before transferring and graduating from the University of Nebraska at the age of 19. He graduated from Columbia Business School, where he developed his investment philosophy around the concept of value investing pioneered by Benjamin Graham. After that, he attended the New York Institute of Finance to focus on his economics background. He created the Buffett Partnership after meeting Charles Munger and bought a textile manufacturing firm called Berkshire Hathaway. He took its name to create a diversified holding company, and the rest is history. He’s been the chairman and largest shareholder of Berkshire Hathaway since 1970.

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Investment Philosophy

Buffett typically considers only companies that have been around for at least 10 years and that he fully understands. Value investing requires identifying companies that have stood the test of time but are currently undervalued. Buffett never underestimates the value of historical performance, which demonstrates the company’s ability (or inability) to increase shareholder value. The value investor’s job is to determine how well the company can perform as it did in the past. To guide him in his decisions, Buffett uses 12 investing tenets in the areas of business, management, financial measures, and value that constitute a foundation in value investing.

Business Tenets

1. Is the business simple and understandable?

2. Does the company have a consistent operating history? Has it weathered economic cycles and competitive pressures?

3. Does the business have positive long-term prospects?

Management Tenets

4. Is management rational in business decisions? What do they do with excess cash? A rational manager will only invest excess cash in projects that produce earnings at rates higher than the cost of capital.

5. Is the management candid with shareholders?

6. Can management resist industrial imperative (the tendency of executives to mindlessly imitate the behaviour of their peers, no matter how foolish it may be to do so)?

Financial Tenets

7. Look for companies with high profit margins. A high ratio means the company generates a lot of profit for every dollar of revenue. This info can be found in a company’s annual report.

8. Focus on return on equity, not earnings per share. Return on equity is a measure of how efficiently a company is handling shareholder money. A good management team will consistently achieve good returns while managing debt to an acceptable level.

9. Calculate “owners’ earnings.” A long-term approach to ‘earnings season’, Buffett created owner earnings as a way to determine a company's total earnings. Take a look at an in-depth explanation of the formula here!

10. For every dollar retained by the company, make sure it has created at least one dollar of market value. This is a great test to tell if a company is allocating capital wisely.

Market Tenets

11. What is the intrinsic value of the business? By knowing how to calculate the intrinsic value of investments, you can identify the best bargains in the market.

12. Can the business be purchased at a significant discount to its intrinsic value?

“Never invest in a business you cannot understand.”

To learn more about Buffett’s investment philosophy, be sure to read The Warren Buffett Way by Robert G. Hagstrom.

His 2019 Picks

Here are some of his latest purchases. (Psst. He recently sold off some of his Apple (APPL) shares!).

  • General Motors (GM)

  • JPMorgan Chase (JPM)

  • Suncor Energy (SU)

  • StoneCo (STNE)

  • Red Hat (RHT)

  • Travelers (TRV)

  • PNC Financial (PNC)

  • Bank of New York Mellon (BK)

Surprising Facts

  • He was rejected by Harvard Business School.

  • He eats like a 6-year-old (McDonald's, Coca-Cola and ice cream).

  • He’s lived in the same house since 1958 (The house is a simple five-bedroom, 2.5-bathroom house).

  • In 2013, Buffett earned $37 million a day.

  • He spends 80 percent of his day reading.

  • He’s a fan of Breaking Bad.

Why we love him

In 2006, Buffett announced that he planned to gradually give 85 percent of his Berkshire Hathaway stock to five foundations – one of which is The Bill and Melinda Gates Foundation. He’s been fulfilling this promise ever since. Since 2006, he’s donated more than $30.9 billion worth of Berkshire Hathaway stock to various charities.

He’s pretty savvy at parenting too. In 1986, Buffett told Fortune magazine that he wants to leave his kids “enough money so that they would feel they could do anything, but not so much that they could do nothing.” The rest of it will go toward philanthropic causes.

“If you’re in the luckiest 1% of humanity, you owe it to the rest of humanity to think about the other 99%.”

Want to share your investing experience? No experience too big or small so get in touch! We’d love to feature our very own Hatch investors as well as the masters.

Image: USA International Trade Administration [Public domain]


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