5 things every investor can learn from Warren Buffett

Legendary investor Warren Buffett turns 95 on Friday. For 60 years, Buffett has led Berkshire Hathaway as its CEO, having taken the reins in 1965. Clearly, longevity is a key pillar in the Oracle of Omaha’s investment handbook, as Buffett has continually touted the benefits of bedrock “buy and hold” investing that rewards investors who stay patient and stick to the script — rather than try to time the markets.

“The specific skills that made Warren Buffett a great investor included having a long-time horizon, intelligence, patience, temperament, curiosity, persistence, hard work, along with knowledge of accounting and financial analysis,” said David I. Kass, a finance professor at the Robert H. Smith School of Business at the University of Maryland. “Buffett has said that what differentiates successful investors from others is having the temperament not to panic and sell when stocks are declining rapidly, nor get euphoric and buy when they are rising sharply.”

Buffett brings a light touch to tough market decisions. He once joked that anyone with an IQ greater than 125 should sell the extra points, taking a shot at market mavens who make investing complicated when it’s actually about mastering the basics.

“Buffett has demonstrated the emotional control necessary to succeed,” Kass noted. “For example, during the financial crisis of 2008, he effectively became the lender of last resort to Goldman Sachs and General Electric, and later in 2011, Bank of America.”

Buffett also brings hard work to the investment table, typically spending over 12 hours each day reading financial reports of companies of potential interest to him. “In his younger days, he visited many small obscure companies to interview their CEOs over a wide geographic area,” Kass said.

With 60 years under his belt at Berkshire Hathaway, let’s take a look at some of the investments that made Buffett a revered name among stock pickers.

One of Buffett’s greatest strengths was making investors think about companies not as tickers on a screen, but as real businesses with people running them.

“A great example is Nebraska Furniture Mart, which he discussed in his 1983 shareholder letter,” said Dr. Stephan Shipe, an economist and finance professor at Wake Forest University, and the founder of the investment advisory firm Scholar Advising. “He told the story of Rose Blumkin, who built the business from a pawn shop into a retail giant through relentless work and an eye for value.”

Buffett wasn’t just buying stock; he was buying into Blumkin’s leadership, business model, and legacy. “That mindset changes how you evaluate an investment,” Shipe said.

That’s why the biggest influence Buffett has had on Shipe is the importance of long-term thinking. “He wasn’t interested in ‘get in, get out’ trades,” Shipe said. “Buffett looked for companies he could own for decades, building a portfolio meant to last, not to trade.”

Buffett had built a reputation as someone who largely avoided technology stocks, as they were mostly against his solid and stable investment philosophy.

“For investors, it’s a fact of life that if we want to outperform the market or an index over time, we must be doing something different,” said Ardal Loh-Gronager, managing partner of London-based Loh-Gronager Partners. “Inevitably, there will be periods, sometimes extended periods, when we underperform that market or index.”

As Buffett admitted being called a dinosaur for missing the tech bubble of the late 1990’s. But he had a persuasive response. “‘I will not abandon a previous approach whose logic I understand even though it may mean foregoing large, and apparently easy profits to embrace an approach which I don’t fully understand, have not practiced successfully, and which, possibly, could lead to a substantial permanent loss of capital,” he said.

During this time, Berkshire Hathaway’s stock halved in value while the S&P doubled in value, but again, patience paid off for Buffett.

“Ultimately, Buffett was vindicated when many of these ‘hot tech’ stocks went to zero when the dot.com boom went bust in the year 2000 and Berkshire stock more than doubled in value,” Loh-Gronager said. “Many people read too much into these actions by saying Buffett did not buy tech stocks. Yet, Buffett proved everyone wrong again.”

The world’s most famous value investor would go on to buy Apple, a major technology name, in 2016.

“With Apple, Buffett made his biggest ever investment return on a single stock at about $100 billion and counting,” Loh-Gronager added. “He could only have made this purchase by being a lifelong learner and always evolving his investment process.”

Buffett has described Geico stock as his “favorite child,” and for good reason.

As a 20-year-old graduate student at Columbia University, he took a train from New York City to Washington on a Saturday in January 1951 to visit the headquarters of Geico, where Buffett reportedly knocked on the door until a janitor finally let him in.

“Future Geico CEO Lorimar Davidson spent three hours with Buffett that day to explain the business of automobile insurance, which was a form of insurance that every motorist was required to buy,” Kass said.

Buffett gradually built up a stake in Geico, and eventually, the entire company was acquired by Berkshire Hathaway. “With Geico, Buffett learned how the ‘float’, e.g., the difference between premiums received and claims paid, could be used to invest in equities resulting in high returns for the company,” Kass noted.

Other market experts say Buffett’s purchase of Geico stock is the most important decision ever made at Berkshire.

“The float from Geico has been the engine that has powered the entire operation,” said James Bowman, founder at Wave Wealth Planning, LLC., in Nashville, Tennessee. “When you have a business that generates tons of cash flow that costs you nothing, via profitable underwriting, and you can put this into wonderful businesses and let them compound for decades, the result can be magnificent.”

By aggressively pursuing a meeting with Davidson, Buffett set the tone for decisive action as a stock picker. “That’s what he tends to do when a huge opportunity presents itself,” Bowman noted.

Another Buffett stock-picking building block is that he’s extraordinarily patient and unemotional when it comes to the stock market.

“That innate skill enables him to wait for the best opportunities and allocate capital during periods of extreme panic,” said Macrae Sykes, portfolio manager of the Gabelli Financial Services Opportunities ETF (GABF) at Gabelli Funds.

One of Sykes’ favorite Buffett portfolio selections is American Express. “Buffett tends to focus on companies that exhibit ‘entrepreneurial mindsets’ in capital allocation, customer relations, and building competitive moats,” he said.

Amex fits the bill there.

“American Express CEO Stephen Squeri continues to drive impressive shareholder returns due to an intense focus on client value proposition, industry best class service, and innovation, and leveraging the unique capital generation for future growth,” Sykes said. “His leadership embodies that entrepreneurial spirit that is critical to future asset compounding.”

One of two major railroads operating west of the Mississippi River, BNSF was purchased by Berkshire Hathaway in 2010.

“Buffett’s BNSF railroad purchase was surprising at the time,” said Asher Rogovy, chief investment officer at Magnifina, LLC in New York City. “At the time, everyone was focused on technology and finance, but he identified a rare undervalued asset. A rail network and property rights supporting it are not easy to build these days.”

Buffett has a rare mind for numbers and the ability to see through accounting statements to what’s actually happening with a business, and his BNSF pick is a good example of that. “He’s able to focus on actual evidence rather than resorting to guesswork, while so many investors operate on guesswork and speculation,” Rogovy said.

BNSF is also a good example of Buffett’s ‘moat’ investing calling card. It’s also a concept that many investors get wrong.

“Technology seems like an obvious moat, but it’s constantly evolving and rarely provides a durable moat,” Rogovy said. “Moats can be simple things, like brand value or network effects.”

Bowman, who calls Buffett his greatest stock-market teacher, reads something from his letters or annual meetings every day.

“Every investment decision that I make for myself and my clients passes through a filtered checklist that is created from Warren Buffett’s investment wisdom,” he said. “He’s enabled me to serve our clients and help them to compound their money in a way that helps them to live their version of the good life, including retirement, college funding, and giving back to their communities.”

“If every finance major in the country read each of his letters to shareholders, it might be more valuable than the entire cost of their undergraduate degree,” Bowman added.