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Warren Buffett's Strategy
In the previous Article we learned about the potential strategies Benjamin Graham thought could be applied to stock investing. Today we are going to learn about a very famous one that has worked for decades.
Warren Buffet is considered one of the greatest investors of all time. He actively manages Berkshire Hathaway and has done so for over fifty years now. Warren Buffett purchased Berkshire Hathaway in 1965 and over the years, created the world’s largest holding company and, in parallel, he built a personal fortune.
“From 1965 through 2021, Berkshire shares generated a compound annual return of 20.1% against 10.5% for the S&P 500.”
So, what is his secret?
The Buffet approach consists on finding great companies with a really perdurable moat, not overpaying for them and holding them for as long as possible. This type of company generally offers a unique service that the public requires systematically, which allows the company to have pricing power, higher margins and less expenses.
The three pillars of this strategy are equally important. In the future, I’ll write a particular article about every single one of them. But in today’s I’ll briefly summarize Warren’s philosophy.
MOATs and their relevance.
A MOAT is a competitive advantage that allows a company to keep competitors away from their market share, just like an actual moat does for a castle.
Investing is all about the future and a business having a true MOAT, in a certain way, allows investors to more accurately ‘predict’ this business future cashflows, since they are ‘protected’.
Your investment returns will be the product of two things:
· What you bought
· How much you paid for it
It’s logic to conclude how relevant the price you pay for something is for your future returns.
Holding for as long as possible
Warren was one of the first to come up with this rather ‘simple’ concept but which is actually rare and the opposite of what everyone does. “In terms of how long stocks stick around in a portfolio, the average investor holds shares for 5.5 months.”
Investors fall victim of fear and boredom. The market’s inherent volatility fears a lot of investors and does not allow them to hold a particular stock or an ETF. In the same way, this volatility makes investors think they can time the drawdowns to maximize their returns. Of course, they can’t.
This, according to Buffet’s approach and data, goes against an investor’s own interest.