Warren Buffett: Investment Strategy, Portfolio and Books – Biography

In this article: 1. Warren Buffett's background 2. About Buffett and Graham 3. Buffett's two investment rules 4. Warren Buffett's Investment Strategy 5. Buffett and Coca-Cola 6. Best books about Warren Buffett 7. Warren Buffett's Portfolio 8. End note

Warren Buffett is one of the most respected investors of all time. He was born in Omaha on August 30th, 1930. He developed an interest in the world of investing at an early ag e. His net worth is over US $100.6 billion as of April 2021. What is his secret to success? What makes him an investment legend? Let's find out!

Warren Buffet’s Background:

Warren Buffett is considered to be one of the most successful investors in the world. He is popularly known as the Oracle of Omaha. Forbes named him the sixth richest man in the world in 2020. He developed an interest in business and investing when he was just nine years old. He spent time at a regional stockbroking firm near his father's own brokerage office. He applied for Harvard Business School but was rejected. He later secured admission in the Columbia Business School after learning that Benjamin Graham taught there. He earned a Master of Science in Economics in 1951. Benjamin Graham authored the book The Intelligent Investor in 1949. It is Buffett’s favorite book. He considers it to be the best book ever written on investment even after 70 years of publication. Buffett learned a very basic but important lesson of investment when he was 11. He purchased three shares of Cities Service for $38 per share. Shortly after buying the stock, it fell to over $27 per share. Buffett panicked but held his shares and waited for them to bounce back. As soon as the price went up to $40, he sold his shares immediately. Shortly after, he regretted his impulsive decision of selling them. The share price had shot up to $200. This taught him how important it is to have patience while investing for long term. Today, at the age of 90, he is the chairman and CEO of Berkshire Hathaway. It is an American multinational conglomerate that owns a diverse range of businesses. As of March 31, 2021, it is the tenth-largest public company in the world. The company owns more than 60 companies. In 2018, Forbes named him to be the 16th most influential person in the world. One of the reasons behind Buffett’s fortune is his investing approach. Let's understand what is Warren Buffett's investment strategy and what he looks for before buying a stock.

Buffett & Graham:

Warren Buffett was Benjamin Graham's student at the Columbia Business School. He was the only student to earn an A+ in Graham's classes. He followed and look up to Graham and wanted to work for him. Sadly, Benjamin Graham had turned Buffett down many times. But he was absolutely determined to work with Graham. He looked up to his investment approach and philosophy.. He even offered to work for Graham for free. Finally, Graham agreed and invited Buffett to join him. Buffett spent his days searching for investment opportunities and reading S&P reports. Soon after, differences between the Graham and Buffett philosophies began to emerge. Benjamin Graham solely relied on and believed in quantitative methods to analyse a company. But Buffett believed that we must look beyond the financial numbers. He looked for quantitative as well as qualitative methods. Graham was only interested in the balance sheet, income statement, and cash flow statement. Whereas Buffett was interested in how a company operates.

• What made it better than its competitors?
• How much manpower does the company have?
• Where is the company located?
• Who manages the company at the top level?
• What is their business model?
• Do they have any economic moat?

Two Investment Rules:

1. Buy what you understand

Buffett picks stocks of companies whose operations he can analyse effortlessly. Don't get involved in investments that are overly complex. That is the reason why Warren Buffett didn’t suffer a loss in the internet bubble between 1995 to 2000. The technology was new and untested. Thus, Buffett did not bother looking in and analysing such companies. He didn't understand the technology, so he didn’t invest in them.

2. Buy and Hold

‘The stock market is designed to transfer money from the active to the patient.’  – Warren Buffett When you buy a stock, your goal should be to buy it and hold it no matter what. Look above and beyond the recession or the economic boom. Impatient investors let anxiety and emotion control their decision-making. The best way to improve your patience is by ignoring the outside noise. Do you know anyone who has held on to the same stock for 10 years? Warren Buffett has held Coca-Cola, Wells Fargo, and American Express for more than 20 years. He has owned Moody’s for 15 years now and three other stocks Proctor & Gamble, Walmart, and U.S. Bancorp for over a decade. You might have heard about the magic of compounding. That is exactly what happened with Buffett. Every year his investment compounded and added value to his portfolio. All he had to do is research quality companies, invest in them, and hold. ‘If you aren’t thinking about owning a stock for ten years, don’t even think about owning it for ten minutes.’ – Warren Buffett

Buffett’s Investment Style and Strategies:

Warren Buffett strongly advocates and follows value investing. This means identifying and buying stocks that are trading at a price lesser than their intrinsic value. He focuses on purchasing stocks of a company that are fundamentally strong. The ones that show a persisting growth potential with strong earning power. The parameters Buffett involves while selecting the stocks of the companies are listed below: -

1. Management Strategy

In his 1989's letter to shareholders, Warren Buffett wrote - ‘Stick to proven management with a lot of integrity, talent, and passion. After some other mistakes, I learned to go into business only with people whom I like, trust, and admire.’ The future success of a business is directly related to the quality of its management. Buffett strongly emphasizes the need to check for good managers when it comes to investing in a company. He believes the quality of the management is a key factor in whether a stock will be a good investment. It is impossible to put a numerical value on a company’s management. We can't rate them on a scale of one to ten. The entire process of evaluation is more qualitative than quantitative in nature. You cannot tell beforehand what are the management's intention. The best we can do is do our personal research to understand them. Here are few ways on how we can do that - a. Profit track records and allocated capital Review the track record of the company. How has the management allocated capital and what are the results of those allocations? Where is the company distributing its profit? Are they distributed to shareholders in the form of dividends? Or are they reinvested to earn profits? Warren Buffett favors distributing profits to shareholders. He believes that the company has an obligation to increase the shareholder’s value and hence must pay out dividends. b. How long have they been in their position? It is a good sign if the management has a long-term track record of successfully and faithfully managing a company. It increases the odds that they will continue to manage the business successfully. c. Reputation Keep your ears out for the reputation of the management. Talk to people, their employees, suppliers & distributors. Understand how the management treats them and their opinion on the management. You can gain great insight into their character by understanding how they are compensated. Check for their long-term or short-term performance rewards. d. Communication Is the management communicating clearly to their stakeholders? One of the best ways to understand this is by reading their annual report. Check out the Director’s Report and the letter from the CEO to its stakeholders. Read the Management Discussion and Analysis Report where the management shares their views, opinions, and future outlooks. These letters will help us have a clear understanding of their future potential. e. Read and gather information There are various books where the management shares their stories. These stories are often sugar-coated but they will tell you about the author and the company. There are various books written by an outside author where they compile stories of such management. Such books offer us an unbiased opinion. For example, The Inheritors by Sonu Bhasin is a collection of stories of India's prominent brands. It focuses on culture, family politics, ego battles, business rivalries, and a lot more. It offers behind-the-scenes information into what goes behind India's leading brands like Marico, Dabur, Motilal Oswal, Berger Paints, Select Group, Max Group, and many others. Good management is a factor in the computation of the intrinsic value of a company. It is an integral part of the investing process. As a value investor, one must ensure that the company puts shareholder’s value above any selfish motives. 2. Strategy in Financial Measures - Value Strategy Warren Buffett has mastered the art of value investing. To check the financial position of a company, one needs to check few quantitative aspects. Here are few points that Warren Buffett looks for in Financial Statements - a. Retained earnings Retained earnings are a part of net earnings or the profit a company makes. A part of the profit is retained by the company to either reinvest in the business or pay off debt. The rest is distributed as dividends to the shareholders. If a company is not increasing its retained earnings, it is not growing its net worth. The growth rate of retained earnings is a good indicator of whether it’s profiting from a competitive advantage. Microsoft has negative retained earnings because they buy back shares to pay dividends. Warren Buffett prefers when profits are distributed to shareholders. b. Return on Equity (ROE) Formula: Net earnings / Shareholder’s equity It is the returns earned by investors for every unit of invested capital. High return on equity means the company is making good use of its earnings. This ratio helps us understand how much profit a company is able to generate for its shareholders. Buffett considers it a positive sign when a company is able to earn above-average ROE. Suggested Read: What is Return on Equity (ROE)? ROE Formula & DuPont Model c. Long-term Debt ‘If you're smart, you're going to make a lot of money without borrowing.’ Warren Buffett prefers companies with low debt and high-profit margins. If the company can pay off all long-term debts within four years it appears to be in a good position. Over the years, Buffett has advised investors to stay away from debt. Especially when it comes to buying stocks. His historic purchases show that he invests in a company that has enough earnings to pay all long-term debt within a couple of years. Carrying little to no debt gives a comparative advantage to the company. This is because the company generates enough profits to finance its loans. To put it in simple language, Buffet says that, ‘if you buy things you do not need, soon you will have to sell things you need.’ d. Cash and Equivalents Can the company get on without enough liquidity to sustain itself? Warren Buffet places the greatest emphasis on cash flow. He believes that cash is king. Whenever a company is struggling with short-term problems, Buffet looks at its cash position. It gives him a fair idea if the company has the financial strength to step out of short-term challenges. Lots of cash and marketable securities with less debt is an ideal position for a company. In such situations, we can focus on long-term growth rather than worry about short-term problems. e. Economic Moat and Competitive Advantage Warren Buffet introduced the concept of economic moat. It is the competitive advantage a company enjoys over its competitors. A company that has an economic moat rewards the investors in the long run. Such companies grab Buffett's attention. For example, Coca-Cola has the advantage of a massive distribution network. It has created its own brand value and name. This allows the company to operate more efficiently than competitors. Economic Moat can come in the form of cost advantages, brand names, or high switching costs for consumers.

Warren Buffet and Coca-Cola:

When Buffett was only six years old, he used to buy six packs of Coca-Cola from his grandfather's store. Each pack used to cost him 25 cents which he resold for 30 cents, pocketing a five-cent profit. However, he did not invest the earned money buying their shares. Later, he started collecting bottle caps from the street. He collected over 8,000 caps and observed that the highest number of caps were of Coca-Cola. He concluded that it perhaps is people's most preferred drink. He immediately began researching and analysing quantitative aspects of the company. In 1988, he started buying a significant number of Coca-Cola shares. He bought more than $1 billion of their shares, roughly equal to 6.2% of the company. After more than 30 years of his first Coca-Cola purchase, he still holds the stocks in his portfolio. One share of Coca-Cola costed approximately $2.45 in 1988. Its share price today is $53.98. That is an approximate increase of 2,246% over the years.

Best Books about Warren Buffett:

Surprisingly, Warren Buffett has never written a book. But there are more than 47 books with Buffett's name in the title. The only other living people with such records are world political figures and Dalai Lama. Here are four books that can help you closely understand Buffett and his investment philosophies.

1. The Essays of Warren Buffett: Lessons for Corporate America by Warren Buffett & Lawrence Cunningham

The 90-year-old investing legend has been publishing the letter for six decades and it has become a must-read for investors around the world. Lawrence Cunningham masterfully pulls out the best of Buffett's annual letters to shareholders. This book is a consolidated compilation of the most interesting parts of Buffett's letters. Buffett said that this book is his own personal favorite amongst any other. He described it as ‘a coherent rearrangement of ideas from my annual report letters’. It covers various topics like primary causes for poor investment results, risk assessment, competition, etc. In its fifth edition, it takes on a more extensive scope than the book The Warren Buffett Way.

2. The Warren Buffett Way by Robert G. Hagstrom

This book outlines the investment principles practiced by Warren Buffett. It lays out the rules of thumb that Buffett uses in his investment approach. It also walks the reader through various case studies out of Buffett’s own portfolio. The book also includes -

1. How to think like a long-term investor.
2. Analysis of Buffett’s acquisition of H.J. Heinz and his investment in International Business Machines (IBM) stock.
3. Importance of behaving rationally during the ups and downs of the market. This is the key to Buffett’s investing success.
4. The philosophy of why loss aversion is one of the biggest obstacles that investors must overcome.

The new edition of The Warren Buffett Way explains the psychological aspects of Buffett’s approach. It provides the best roadmap to various principles that made Buffett the greatest investor of our generation. This book continues to be a powerful read even when you know how to invest smartly.

3. The Warren Buffett CEO by Robert P. Miles

This book shows a side of Warren Buffett that is often overlooked because of his portfolio performance. Much has been written about his philosophy that made him the most successful investor. This book focuses on his role as manager of Berkshire Hathaway. Robert Miles writes about his management style that has proven successful for both Buffett and Berkshire Hathaway. The book also includes rare interviews with executives within Berkshire Hathaway's holdings. This book will give you a glimpse of what it is like to work for the sixth richest man in the world. This makes the book less about Buffett as an investor and more about him as a manager. You will learn a lot about big companies and great management by reading this book. Two aspects that every investor needs to keep in mind.

4. The Snowball: Warren Buffett and the Business of Life by Alice Schroeder

This is a 970-page long biography of Warren Buffett by Alice Schroeder. This book tells you why Buffett is the most fascinating American success story of our time. The legendary investor has never written a memoir. But he has allowed Alice Schroeder to explore with him his work, opinions, struggles, triumphs, and wisdom. When Alice Schroeder met Warren Buffett, she was an insurance industry analyst. Her writings on finance impressed him. She realized that not much has been written about his larger philosophy, personality, and details of life. She took this to herself and decided to write a book talking about the same. Buffett decided to cooperate with her on the book about himself which he would never write. Recommended Read: 7 Books Warren Buffett Says is a Must Read

Warren Buffet’s Portfolio:

Here are few Warren Buffett stocks by the number of shares held based on Berkshire Hathaway's most recent 13-F filing.

	Holdings	Market Price	Value	Stake
Amazon.com, Inc.	5,33,300	$3,467.42	$1,849,175,086	0.10%
American Express Company	15,16,10,700	$153.35	$23,249,500,845	18.90%
Apple Inc	90,75,59,761	$131.46	$119,307,806,181	5.40%
Axalta Coating Systems Ltd	2,34,20,000	$31.89	$746,863,800	10.10%
Bank of America Corp	1,03,28,52,006	$40.53	$41,861,491,803	12%
Bank of New York Mellon Corp	7,43,46,864	$49.88	$3,708,421,576	8.50%
Coca-Cola Co	40,00,00,000	$53.98	$21,592,000,000	9.30%
DaVita Inc	36095570	$116.53	$4,206,216,772	33.90%
Kraft Heinz Co	32,56,34,818	$41.29	$13,445,461,635	26.60%
General Motors Company	7,25,00,000	$57.22	$4,148,450,000	5.00%
Johnson & Johnson	3,27,100	$162.73	$53,228,983	0.00%
Liberty Sirius XM Group Series C	4,32,08,291	$45.23	$1,954,311,002	18.9%
Moody’s Corporation	2,46,69,778	$326.71	$8,059,863,170	13.20%
Procter & Gamble Co	3,15,400	$133.42	$42,080,668	0.00%
Verisign, Inc.	1,28,15,613	$218.77	$2,803,671,656	11.40%
Verizon Communications Inc.	14,67,16,496	$57.79	$8,478,746,304	3.50%
Visa Inc	99,87,460	$233.56	$2,332,671,158	0.50%

End Note: What will happen to a snowball if you push it down the hill? It will keep rolling to grow into a giant snowball. This is similar to compounding. It is never too early when it comes to investing. Buffett bought his first stock at the age of 11. By the end of his 50th birthday, he had earned 99 percent of his wealth. Remember, the investment you do today can bring massive returns if you can exercise patience. Warren Buffett rarely worries about the negative news for a particular company. All he does is thorough quantitative and qualitative research for the company he is interested in. What he wants to know is if he understands the business. Is the management capable, experienced, and trustworthy? Is the company undervalued? Is it making money? Investment is simple but not easy. There are various factors and criteria to check before you invest. The best way to ensure that you are making the right choice is by doing your own homework. As Warren Buffett says, ‘The more you learn, the more you earn.’ This is how to invest like Warren Buffett. Invest in long-term qualitative companies. Search for companies with strong fundamentals and great management. Buffett was able to build a fortune by conducting fundamental analysis prior to investing. Start your investing journey today! Open a FREE Demat account instantly with Samco.