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.
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