By Joe Nocera
Fifty years ago, a young investor named Warren Buffett took control of a failing textile company, Berkshire Hathaway. “I found myself ... invested in a terrible business about which I knew very little,” Buffett relates in his annual letter to shareholders, which was released over the weekend. “I became the dog who caught the car.”
Buffett describes his approach in those days as “cigar butt” investing; buying shares of troubled companies with underpriced stocks was “like picking up a discarded cigar butt that had one puff remaining in it,” he writes. “Though the stub might be ugly and soggy, the puff would be free.” He continues: “Most of my gains in those early years ... came from investments in mediocre companies that traded at bargain prices.”
But that approach had limits. It took Charlie Munger, the Los Angeles lawyer who has been his longtime sidekick, to show him that there was another way to win at the investing game: “Forget what you know about buying fair businesses at wonderful prices,” Munger told him. “Instead, buy wonderful businesses at fair prices.” Which is what Buffett’s been doing ever since.
He has done it in two ways. First — and this is what he is renowned for — he has bought stock in some of the great American companies of our time, stock that he has held not just for years, but for decades. Second, he has turned Berkshire Hathaway into a true conglomerate, which owns not just stocks but entire companies. Although Berkshire’s front office employs only 25 people, its companies have, in total, some 340,500 employees.
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[aka Stargazer] Yup. the crony capitalist of Omaha is awesome.
ReplyDeleteRingo's law.
ReplyDeleteBuffett is no exception.
And he knows it.
There was an article many years ago in Forbes about how since Buffet always buys at least 5% of a company, that gives him the right to see the internal accounting books before closing the deal.
ReplyDeleteBuffett's investment advice is excellent. Yet none applying it have independently reproduced Buffett's success. Not his outside disciples scrupulously following every investment principle. Not even his ex-employees. There is more to his formula than he’s letting on.
ReplyDeleteShrewd investment choices, luck, chutzpah, and OPM, were indeed likely essential to propel Buffett into the millionaire club. But I think thereafter the basis for success at that level shifts to cultivating relationships with the rich and powerful for the information and connections needed to raise funds and come-by/vet/close good investment opportunities.
Plenty of hedge funds and investment houses are more than able to perform focused fundamental analysis and hold long term investments. There is nothing special about this approach. And Buffett by his own admission adds no operational value to his investments.
So I'd speculate Buffett's most salient critical success factor is not his investing skill, but fostering his own brand and building his own power platform within the clubby big-league finance sphere. I’m told Buffett is a hard edged master of leverage and deal-making dynamics. The image of the kindly old man getting rich just from making prudent long term investments is re-packaging of what he does for public consumption.
In other words, I’d surmise while good investing skills matter, they are not the secret sauce of Buffet’s billion dollar empire. Rather, building a brand reputation as a good investor is the actual competitive advantage. This is more likely how Buffett decade after decade outcompetes other investors for lower cost capital and better deal flow in self-reinforcing virtuous cycle.
Same approach that Harvard employs to issue forth the most successful graduates decade after decade. Harvard doesn’t have to deliver the best education. It just has to build a brand reputation among college applicants to attract the smartest, most ambitious, most talented. Then it can cherry pick from them, sit back, and take credit for all their future successes in virtuous cycle.
The core competency of Buffet, like Harvard, may really be brand management.