Widely known as the most successful investor in history, Warren Buffett has a very different outlook when it comes to investing in shares. It is so simple that it sometimes defies belief. Buffett, and partner Charlie Munger, sum up their investment approach as one of investing in high quality businesses for the long term. And they have succeeded spectacularly at doing just that.
Since taking over the reigns at Berkshire Hathaway in October 1964, Buffett has increased their book value per share from $19.46 to a staggering $146,186. That is a return of 7000% over a period of 50 years.
But, in Buffett’s own words: “intelligent investing is not complex, though that is far from saying it is easy”.
Looking at Buffett’s investment approach in more detail provides some wonderful clues and principles that can be understood and applied by most investors. John Train, author of The Money Masters, describes Buffett’s investment approach as:
- …a tiny number of wonderful businesses.. Not all businesses can be great investments over the long term. Buffett invests for the long term, rarely selling businesses he has purchased. He has famously stated his favourite holding period is “forever”.
- …at a price…sometime businesses are priced at more then their value making them expense to buy. Buffett avoids hot stocks that are over priced.
- …wonderful businesses are almost given away…sometimes great businesses have a declining share price. Buffett often buys these out of favour businesses when every one else is running for the hills!
- …paying no attention to current gloomy economic and stock market forecasts. Buffett is not distracted by trying to predict the unknowable.
In 2015 Buffett started investing in shares for IBM, despite the problems in recent years that the company had faced. Revenue and earnings had declined steadily with revenue in 2014 falling 8% from 2012; whilst 2014 earnings were down 27% compared to 2012. Why then, would Buffett be buying into such a troubled organisation? Well, IBM is a large company with a strong brand, plenty of resources and an established base of customers. Making the transition to cloud services is their only hurdle and Buffett believes that once they do this, they’ll have a good chance of capturing a fair share of this market. IBM also has a long history of successfully reinventing itself. Founded in 1910, IBM has changed from making clocks and punch-cards in the early 1900’s, the Norden bombsight in the 1940’s for World War II, electric typewriters through the 1980’s, hard drives starting in the 1950’s, mainframe computers in the 1960’s, and pc’s in the 1990’s. While there is no guarantee that IBM will deliver on Buffetts expectations, it is precisely this kind of investment in a beaten down business that has handsomely rewarded Buffett’s investors over decades.
His investment style of patience, discipline and value has consistently outperformed markets for decades and in the aftermath of the 2008 financial crisis when most panicked investors were rapidly selling, he was heavily investing in shares in blue-chip companies like Goldman Sachs, Bank of America, Mars and Dow Chemical. By 2011, just three years after a $5 Billion investment in Goldman Sachs, Berkshire had already received $1.75 Billion back in dividends, which equals a 35% return.
Having relentlessly followed the Benjamin Graham school of value investing, by buying shares and stocks that are unjustifiably low based on the intrinsic worth of the organisation, Buffett has changed the face of investing in shares with his unwavering belief in strong brands, regardless of troubled times, and has proven his philosophy time and time again.
As the Buffett himself has been quoted “Look at market fluctuations as your friend rather than your enemy. Profit from folly rather than participate in it.”
If investing in shares is something that you are eager to do and you would like to make the most of sound investing that uses Warren Buffett’s thinking to guide the process contact AXIAM and our fund managers will be ready to discuss your personal goals and investment strategy.