Some Thoughts on Warren Buffett's Investment Style and His Results!

Dear Reader,

Here I am going to make a small analysis of Warren Buffett's investment style and his results.

I know he is regarded as one of the most successful investors of all time. However, according to various reports Warren Buffett's listed stocks investments portfolio over the past circa 20 years has managed to beat the S&P 500 index by 2.1%.

Why? The reason hides mainly in Warren Buffett's investment style. He invests mainly in listed value stocks i.e. mature companies who have proven their ability to generate substantial profits and revenues in the past. However, these companies do not have excellent growth prospects mainly due to two reasons. First, they are already gigantic in  market capitalization style - most of the time more than 10 bln. USD in market capitalization or so called large cap stocks. Their sheer size constrains them from growing fast. The second reason is that these companies are leaders in already mature industries like banking, financial services, beverages, insurance etc. Even in his private equity style(holds them 'forever') portfolio you will find great difficulty to find companies which have outgrown the rate of growth of the market in terms of revenue or profit or the growth rate of US GDP by substantial amount.

A third reason is that Warren Buffett does not usually invest in growth stocks. Growth stocks in the last 20 years have been predominantly technology stocks and  biotechnology stocks. Warren Buffett is notoriously known to shun technology stocks especially in the 1998-2001 technology bubble. Actually, at these times that was quite a savvy decision.

Recently Warren Buffett invested not so successfully in IBM. 1 Year ago he built a very large position in the ultimate technology behemoth - Apple Inc. Actually due to Apple's size and maturity as a company it is unlikely that this Warren Buffett's investment will also beat the S&P 500 and Nasdaq Composite by a wide margin.

If you want to invest and beat the market by a large margin you have to invest in the current growth stocks which are technology stocks and biotechnology. Or predict the future and invest in the next Big thing i.e. in the next growth stocks. The downside of this strategy is that technology and biotechnology stocks are quite risky measured by their volatility. Some of them could wipe out billions of value in weeks or even become worthless over the long run as evidenced by the 1998-2001 tech bubble.

One advantage of Warren Buffett's investment style is that if you invest in value stocks you can invest huge amounts of money and you have some downside protection - the proverbial 'margin of safety'. But as evidenced by Warren Buffett's investments in Tesco, JP Morgan, Wells Fargo, American Express etc. such companies could also lose tens of billions of market capitalization in months if not weeks. However, Warren Buffett has managed to mitigate these effects by holding a very diversified portfolio - usually holding above 30 individual stocks.

Bottom line. Warren Buffett's investment style has worked brilliantly for his own purposes. But if you are small investor looking to make 50-100% a year you have to invest in much riskier stocks than Warren Buffett does and use much less diversification.

Disclaimer: The blogposts and comments on this blog and posts on social networks(Twitter, LinkedIn etc.) are not investment recommendation, are provided solely for informational purposes, and do not constitute an offer or solicitation to buy or sell any securities. The opinions expressed in the blogpost and posts on social networks(Twitter, LinkedIn etc.) are the author's and they in no way express the opinion or official position of the company where I am working currently!

Conflicts of interest: I may possess some of the securities,currencies or their derivatives mentioned in the blogpost and posts on social networks(Twitter, LinkedIn etc.)!


Kind regards,
Petar Posledovich