Warren Buffett’s Investing Style
By Samarth Singh
Undoubtedly, Warren Buffett is one of the most successful investors of all time. Over the years, his investments have reaped extremely high returns. His net worth is $163B today. Yet, more than half of his net worth (up to $80B) has increased in the past ten years. Of the top ten richest people on the planet, he is one of the only three to make a profit in the past year. While it might seem like the result of a genius masterstroke or even sheer luck, it is a result of calculated and long investment strategies.
Buffett, for one thing, started to invest early. Really early. He was interested in stocks from a young age. One reason why Buffett has amassed such a fortune compared to others is simply because he has invested longer than others. He joined Graham-Newman Corp in 1954 as a Securities Analyst and has been dealing with the securities markets ever since. He famously said, “If you don’t want to own a stock for 10 years, don’t even think about owning it for 10 minutes”.
However, simply investing in stocks cannot ensure one's returns. An element of uncertainty is always present. If there is a potential for profit, then there is, almost certainly, potential for losses. It’s not that Buffett has not had losses in all the time he invested. It is just that all his investments, as a whole, have given profits. On the Bloomberg Billionaires Index, while most billionaires belong to a particular sector (Consumer, Technology, Retail, Food & Beverage etc.), Buffett’s investments are diversified, meaning they are not concentrated in any one industry.
Buffett’s strategy is very closely linked to Benjamin Graham’s Investing Principles. The first principle is to always invest with a margin of safety. Here, an investor tries to buy stocks that are being traded at a discount. That is, the current price of the stock is much lower than the actual stock value. Intrinsic value means the worth of the remaining usage of an asset. If a company has stocks that have not realized the intrinsic value of their assets yet, investing in that company can bring high returns in the future. It also minimises risk, since the intrinsic value of the asset is already high compared to the price of the stock. Buffett says that buying a stock at a price below its intrinsic value can bring returns in the future.
The second strategy is to take advantage of the volatility in the market. A decrease in the price of stocks can allow investors to buy at lower rates and sell when prospects are better. One such method of doing this is to spread investments across gaps. This means that some stocks will be bought at a high price and some will be bought at a low price, but their prices will even out. If you add to this the fact that the majority of shares are bought with a margin of safety, then the average share price will be lower. However, it is important to note that this strategy only works if we consider that markets will move upward in the long run, despite temporary volatility.
Buffett invests not only in multiple sectors but also in assets of varying nature. Stocks are much more volatile while bonds give almost assured returns. In finance, risk is always inversely proportional to returns. So it is important to make a risk-return portfolio with the perfect balance of the two. This balance is different for everyone, but Buffett kept a 90/10 ratio for the two, with 90% of his funds invested in a low-cost S&P 500 Index Fund and 10% in short-term government bonds. This is because he believes that the American markets will give returns, but will do so with several ups and downs in the way. Buffett has been sceptical of active fund management; he believes that in the long run markets on their own give better returns. An important part of investing is knowing what kind of investor one is: active or passive.
Both Buffett and Graham aim to first secure their capital and then gain returns on it. This may be a slower process, but it prevents losses and allows one to keep investing. Perhaps that’s why Buffett can profit even when the rest of the market can’t. His firm, Berkshire Hathaway, made a profit of $4.5B even during the 2008 Financial Crisis.
When Goldman Sachs felt the repercussions of the housing market collapse, it needed funds immediately. Given their position in the market, they made a deal that favoured Buffett. Buffett invested $5B in shares with a 10% annual dividend and also received the right to buy 43.5M of Goldman Sachs shares (at a fixed price of $115) at any point until 2013. This meant that Berkshire Hathaway received $500M every year just as a dividend. This, combined with the returns gained on the price of the stock, gave the company a profit of $3B. Similarly, Buffett invested $3B in General Electric in 2008 and made a profit of 50%.
These examples show his investment strategy in action. First, Buffett takes advantage of market volatility. While most investors were not enthusiastic, he invested heavily (with careful planning and consideration, of course). Second, he gets a deal at a cheaper rate given the financial positions of the companies and markets. This gives him greater returns in the future.
That being said, the finance markets are still a tough game to beat. 80% of investors withdraw funds within two years of being in the market. But, doing it right can give several advantages. It can help plan for a better future, create an emergency fund or meet goals that one can’t with just a paycheck - or if you’re Buffett himself, help a non-profit.
Sources:
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Mohamed, Theron. 2023. “Warren Buffett Injected $3 Billion Into General Electric During the Financial Crisis. Here’s a Look Back at How He Helped the Industrial Giant.” Markets Insider, January 8, 2023. https://markets.businessinsider.com/news/stocks/warren-buffett-invested-3-billion-general-electric-ge-2008-crisis-2020-6-1029327040#:~:text=Warren%20Buffett%20plowed%20%243%20billion,he%20could%20have%20made%20more
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