It might be presumptuous of us to assess an investor who has acquired mythic status, but is Warren Buffett worthy of his reputation? If so, what accounts for his success, and can it be replicated? Statistically speaking, his reputation appears to be well deserved and his extended run of success cannot be attributed to luck (certainly luck would ‘run out’ after so many decades of investing). While he has had his bad years, he has always quickly bounced back in subsequent years. The secret to his success seems to rest on the long view he brings to companies and his discipline– the unwillingness to change investment philosophies even in the midst of short-term failure.
Much has been made of the fact that Buffett was a student of Graham at Columbia University and their adherence to value investing. Warren Buffett’s investing strategy is more complex than Graham’s original passive screening approach. Unlike Graham, whose investment strategy was inherently conservative, Buffett’s strategy seems to extend across a far more diverse range of companies, from high-growth firms like Coca-Cola to staid firms such as Blue Chip Stamps. While Graham and Buffett both might use screens to find stocks, the key difference between the two men is that Graham strictly adhered to quantitative screens whereas Buffett has been more willing to consider qualitative screens. For instance, Buffett has always put a significant weight on both the credibility and the competence of top managers when investing in a company.
In more recent years, he has had to struggle with two byproducts of his success. Buffett’s record of picking winners has attracted a crowd of imitators who follow his every move and buy everything he buys, making it difficult for him to accumulate large positions at attractive prices. At the same time, the larger funds at his disposal imply that he is investing far more than he did two or three decades ago in each of the companies that he takes a position in, which makes it more difficult for him to be a passive investor. It should come as no surprise, therefore, that he is a much more activist investor than he used to be, serving on the boards of The Washington Post, Coca-Cola and other companies and even operating as interim chairman of Salomon Brothers during a crisis in the early 1990s.
Warren Buffett’s approach to investing has been examined in detail, and it is not a complicated one. Given his track record, you would expect a large number of imitators. Why, then, do we not see other investors using his approach to replicate his success? There are three reasons according to Aswath Damodaran, author of Investment Philosophies…
- Markets have changed since Buffett started his first partnership. His greatest successes occurred in the 1960s and the 1970s, when relatively few investors had access to information about the market and institutional money management was not dominant. Even Warren Buffett would have difficulty replicating his success in today’s market, where information on companies is widely available and dozens of money managers claim to be looking for bargains in value stocks.
- In recent years, Buffett has adopted a more activist investment style and has succeeded with it. To succeed with this style as an investor, though, you would need substantial resources and have the credibility that comes with investment success. There are few investors, even among successful money managers, who can claim this combination.
- The third ingredient of Buffett’s success has been patience. As he has pointed out, he does not buy stocks for the short term but businesses for the long term. He has often been willing to hold stocks that he believes to be undervalued through disappointing years. In those same years, he has faced no pressure from impatient investors because stockholders in Berkshire Hathaway have such high regard for him. Many money managers who claim to have the same long-term horizon that Buffett has come under pressure from investors wanting quick results.
In short, Damodaran concludes, it is easy to see what Warren Buffett did right over the last half century, but it will be very difficult for an investor to replicate that success. While that might be true in terms of replicating his success based on what he did because those events may never repeat itself, however, many of Buffett’s investment philosophies are timeless, relevant and applicable in any situation. So I would encourage investors looking to replicate his success to focus on the how and why rather than the what. I believe that Warren Buffett would be every bit as successful in the 21st century as he was in the 20th if he had to start over again today. His investing style does not depend on having better information than other money managers– but rather, having better insights into businesses based on general publicly available information. His greatest tool is being rational and logical with a long-view in the midst of a majority of investors that fall prey to irrational and emotional forces of the market. This is as true today, perhaps more true, than at any time in history. The fact that he is more activist is simply a side effect of so many successful decades of growth that makes Berkshire the 900-pound gorilla that it is.
Warren Buffett is very rational, which means that he insists on owning a promising business that is sold to him at a very attractive purchase price. This can be called a ‘value’ investor, but Buffett often reminds us that growth is an important component (sometimes positive and sometimes negative) in the value calculation. I’ve already started us on a journey over several articles to investigate what a ‘value’ investor really is… hope you will find it interesting.
Credits: parts of this article are extracted from Aswath Damodaran’s Investment Philosophies: Successful Strategies and the Investors Who Made Them Work, 2003.