Why Warren Buffett is Different Than Most Investors: Part I

Why Warren Buffett is Different Than Most Investors: Part I
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There was an academic article published recently on the investing of Warren Buffett.  Afterward, I thought I saw a few articles reflecting on it, but here is the only one I see now: There’s Warren Buffett — and then there’s the rest of us.

Why Warren Buffett is Different Than Most Investors: Part I

Buffett is different, because he grew as an investor and as a businessman, and usually made the right moves over a 50+ year career.  When you don’t have a lot of assets, and few people are doing value investing, you can do amazing things with special situations, and being an activist investor.  In 1967, Buffett had control of a textile company named Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B), when he used the resources of the company to purchase some smallish P&C insurance companies, National Indemnity and National Fire and Marine Insurance.

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This brings up the first way that Buffett is different than most investors.  He understands and invests in a complex industry, P&C insurance.  He begins to realize that it can be used as a platform for greater investing.  As he sees that potential, he buys half of GEICO in the 70s, before buying the whole company in 1994.

This brings up the second way that Buffett is different than most investors: Buffett was willing to buy whole companies, not replace management for the most part, and operate them.  Buffett limited himself to being the wholly-owned company’s board, asking questions on management competence, and redirecting free cash flow for the greater good of Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B).

That brings me to the third way in which Buffett is different than most investors: He analyzes cash flow streams from investments, and buys shares in companies, or the whole company when they offer a reliable high prospective free cash flow yield.  And it brings me to the fourth way Warren Buffett is different than most investors: Buffett does not diversify, particularly in the early years.  He plays for best advantage.  Buffett views investing through the lens of compounding cash flows, and does not pay much attention to the market as a whole.

In my opinion, it is a worthy use of time (but don’t neglect your family) to read through the annual letters of Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B).  If you do that, you will get a sense of a clever businessman who would invest for best advantage.  His tactics shifted over time, but he was always looking to compound free cash flows at the best possible rate.

I’m going to hit the publish button now, but I will finish this in part 2.

By David Merkel, CFA of Aleph Blog

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David J. Merkel, CFA, FSA — 2010-present, I am working on setting up my own equity asset management shop, tentatively called Aleph Investments. It is possible that I might do a joint venture with someone else if we can do more together than separately. From 2008-2010, I was the Chief Economist and Director of Research of Finacorp Securities. I did a many things for Finacorp, mainly research and analysis on a wide variety of fixed income and equity securities, and trading strategies. Until 2007, I was a senior investment analyst at Hovde Capital, responsible for analysis and valuation of investment opportunities for the FIP funds, particularly of companies in the insurance industry. I also managed the internal profit sharing and charitable endowment monies of the firm. From 2003-2007, I was a leading commentator at the investment website RealMoney.com. Back in 2003, after several years of correspondence, James Cramer invited me to write for the site, and I wrote for RealMoney on equity and bond portfolio management, macroeconomics, derivatives, quantitative strategies, insurance issues, corporate governance, etc. My specialty is looking at the interlinkages in the markets in order to understand individual markets better. I no longer contribute to RealMoney; I scaled it back because my work duties have gotten larger, and I began this blog to develop a distinct voice with a wider distribution. After three-plus year of operation, I believe I have achieved that. Prior to joining Hovde in 2003, I managed corporate bonds for Dwight Asset Management. In 1998, I joined the Mount Washington Investment Group as the Mortgage Bond and Asset Liability manager after working with Provident Mutual, AIG and Pacific Standard Life. My background as a life actuary has given me a different perspective on investing. How do you earn money without taking undue risk? How do you convey ideas about investing while showing a proper level of uncertainty on the likelihood of success? How do the various markets fit together, telling us us a broader story than any single piece? These are the themes that I will deal with in this blog. I hold bachelor’s and master’s degrees from Johns Hopkins University. In my spare time, I take care of our eight children with my wonderful wife Ruth.

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