What Is The Secret To Buffett’s Success?
Warren Buffett is widely considered one of the most successful investors of all time, with a net worth of over $100 billion. So, what is the secret to his success? We check out Buffett’s track record and spotlight buys and sells that highlight how he became so wealthy.
Berkshire Hathaway’s Returns Since Buffett Took Over as CEO
Since Buffett took over as CEO in 1970, the company’s per-share book value has grown at a compound annual rate of 19.7%, outpacing the S&P 500’s 9.9% return over the same time period. This means that an investment in Berkshire Hathaway in 1970 would have grown over 17 times in value by the end of 2020, compared to a seven-fold increase for the S&P 500.
But Berkshire Hathaway’s returns go beyond just its share price appreciation. The company also generates significant income through its various subsidiaries and investments, which has helped to boost overall returns.
For example, in 2020 Berkshire Hathaway reported $24.8 billion in net income, with over 60% coming from non-insurance businesses. This diversified income stream has helped to cushion the company’s performance during market downturns and has contributed to its long-term success.
Buffett’s Investment Philosophy and Strategies
So, what is behind Berkshire Hathaway’s impressive returns? Much of it can be attributed to Warren Buffett’s investment philosophy and strategies.
Buffett has long been a proponent of value investing, which involves seeking out undervalued companies with strong fundamentals and holding onto them for the long term. This approach has helped him to identify undervalued opportunities that others may have missed and to benefit from the eventual market recognition of a company’s true worth.
Buffett is also known for his discipline and patience, qualities that have served him well in his investment career. He has famously said that “the stock market is a device for transferring money from the active to the patient“. This means that he is willing to wait for the right investment opportunities and is not swayed by short-term market fluctuations or investor fads.
One of the keys to Buffett’s success has been his ability to identify and invest in companies with strong, sustainable competitive advantages. He has famously said that he looks for companies with “moats,” or sustainable competitive advantages that protect their profits and market share from competitors.
These moats can come in the form of brand recognition, cost advantages, distribution networks, or other factors that give a company a lasting edge in its industry.
Buffett has also been successful in part because he is not afraid to admit when he has made a mistake and to move on from an investment. For example, in 2020 Berkshire Hathaway reported a $9.8 billion loss on its investment in airline stocks, which had been hit hard by the COVID-19 pandemic. Rather than holding onto these underperforming investments, Buffett recognized the mistake and sold off the airline stocks, showing that he is not afraid to cut his losses when necessary.
Buffett Has High Conviction In His Bets
One well-known anecdote that illustrates Buffett’s success is his bet with Protégé Partners, a hedge fund firm, in 2007. Buffett bet that a low-cost S&P 500 index fund would outperform a basket of hedge funds selected by Protégé Partners over a 10-year period.
As of 2021, the index fund was up 85.4%, while the hedge fund basket was up just 22.6%. This bet highlights Buffett’s belief in the long-term value of low-cost index funds and his skepticism of the added value that some actively managed funds claim to provide.
Another bet that highlights Buffett’s conviction is his early investment in Apple. In 2016, Berkshire Hathaway purchased 9.8 million shares of Apple, worth around $1 billion at the time. As of 2021, those shares were worth over $100 billion, a ten-fold increase in just five years. This investment demonstrates Buffett’s ability to identify undervalued companies with strong growth potential and to hold onto them for the long term.
Buffett’s success is his buyout of Precision Castparts in 2015 further highlights how when he bets big, he usually wins in spite of short-term headwinds. Berkshire Hathaway paid $37.2 billion for the aerospace parts manufacturer, a price that some analysts considered steep at the time.
However, just a few years later, the company’s value had increased by over 50%, thanks to strong demand for its products and a favorable market environment. It’s clear that Buffett is not afraid to pay a premium for a company he believes in, as long as he thinks the long-term value is there.