20 Feb 2015

Want to invest like world's most renowned investor - Warren Buffett? ...things you may not know about him

By: Maike Currie
Every February, the world's most renowned investor - Warren Buffett - publishes his annual letter to shareholders of his company, Berkshire Hathaway.

The letter, published ahead of the annual company meeting, dubbed the 'Woodstock' for investors, is routinely trawled over by Buffett-worshippers for insights into the Sage of Omaha's thinking.

This year, as Buffett celebrates 50 years at the helm of Berkshire Hathaway, he plans to add his reflections on five decades of investment to the annual letter. There's little doubt that the letters' content will fill up column spaces and dominate headlines in coming weeks.

Beyond the folksy anecdotes and home-spun wisdom, here are four things you won't read in Buffett's letter, but probably should know about the world's greatest investor.


1. You probably can't be the next Buffett

Writing about Warren Buffett and reciting so-called 'Buffet-isms' is its own industry these days. Whether it's his former daughter-in-law, Mary Buffett or Seth Klarman (the new 'Buffett'), everyone has some advice on how to emulate the man and his methods, and get rich as a consequence.

But can you really become Buffett? Cullen Roche, author of Pragmatic Capitalism – What every investor needs to know about money and finance, thinks not. He believes the myth of Warren Buffett is one of the greatest misconceptions in the financial world.

Buffett, he points out, is not a 'frugal, regular old guy with a knack for picking stocks' but rather an exceedingly sophisticated businessman.

Like most very wealthy people, he created his wealth by creating his own company. Roche describes Berkshire as the world's 'largest option-writing house' with the premiums and cash flow from Buffett's insurance businesses used to create dividends that he could invest in other businesses.

Berkshire Hathaway, says Roche, uses sophisticated insurance underwriting, complex fixed-income strategies, multi-strategy equity approaches and tactics. Replicating this won't just be difficult; for most private investors it will be nigh on impossible.

2. But some investors have got close

Reading Roche's insights, it is easy to discount the influence Buffett has had on a generation of successful investors. That would be a mistake. While he might be a shrewd businessman, he is a good investor in equal measure, and there are many lessons to be learnt from Buffett.

Testament to this is the investors who have followed Buffett's mantra and done well as a result. Take Nick Train, manager of the CF Lindsell Train UK Equity Fund. A self-confessed Buffett disciple, Train follows his messiah's approach of buying companies he considers to be great businesses with good management and then holding them for the long-term.

Another example is Terry Smith of the Fundsmith Equity Fund. Smith looks globally for quality businesses which boast advantages that are difficult to replicate - the Warren Buffett 'competitive moat' idea, where the castle is the company and the moat is the business's competitive advantage. The wider the moat - a strong brand, pricing power, a dominant slice of market demand - the larger and more sustainable the competitive advantage.

Judging by the track record of both investors, applying Buffett's principles has served them well. Perhaps the fairest assessment is this: You probably won't be the next Warren Buffett but you can always become a better investor, and one way of becoming a better investor is by learning from the greats.

3. It's about quality investing
Ask Buffett, who he thinks is the greatest investor in the world, and he will probably tell you his teacher: Benjamin Graham.

Having studied economics at Columbia Business School, Warren Buffett was taught by Benjamin Graham, and if that was not enough of a head start in his investment career, Buffett was fortunate enough to work with Graham, too. Both are seen as value investors – buying companies that trade less than their intrinsic values.

However, there is a school of thought that sees value as a bit of a misnomer. Clyde Rossouw, manager of the Investec Global Franchise Fund, argues that while Graham is known as the father of value investing, in truth he should probably be known as the father of quality investing, as most of the characteristics he speaks about in terms of the companies he looks for references 'quality' attributes, rather than value.

Value investing by definition involves buying bargains.

However, given the choice between buying a good-quality company rated on a higher price, or a lower-quality company attractively priced, Buffett, like Graham will opt for the former.

That's because investors are more inclined to pay up for quality companies. In turn this offers potential for the share prices of good-quality companies to recover to (and above) their long-term average earnings multiple.

4. Buffett could be changing the way he invests

Besides gearing up for 'Investor Woodstock', what is the Sage of Omaha doing now? Sitting on a lot of cash – according to media reports Berkshire currently has around $25 billion in excess cash.

This 'challenge' of too much cash, some argue, is changing Buffett's investment approach. Rossouw points to Buffett's investment in Burlington Northern Santa Fe Railroad operator, as an example of the investor trying to shed some of this cash. 'Yes, this investment has a strong 'moat' but it is highly capital intensive – keeping a railway maintained requires you to spend a lot of money consistently over time. It helps Buffett deal with a key problem which is the largess of excess cash generated by his insurance businesses each year.'

Buffett's cash pile could mean many things. It could be, as some believe, a problem of too much money, and not enough investment opportunities. It could be a precautionary measure to make sure his company is well positioned to cope in an increasingly uncertain environment. It could be that Buffett is positioning himself to make another big deal.

Or it could be all of the above. But then we can't know everything about the most glorified and respected investor of our time.


Maike Currie is associate investment director at Fidelity Worldwide Investment.

Credit: Maike Currie/ThisIsMoney/DailyMail

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