How Warren Buffett Built His Long-term Investment Portfolio

In early 1980, you could buy one share of Berkshire Hathaway Class A (BRK-A) common stock for $285. That may have seemed pricey then, but by mid-2004, one share had soared to over $86,500. The genius behind this incredible growth is Warren Buffet, the chairman of Berkshire Hathaway, also known as “The Oracle of Omaha.” How did he do it? What principles guided him? Read on to discover his investment approach and the lessons his journey has taught so far.

How did he start investing?

Warren Buffett’s interest in finance began early. At 11, he bought his first stock, Cities Service Preferred, and sold it for a 4.6% gain. By 14, he had saved $1,000 for investing. In high school, he made several successful investments. He studied economics and finance at the University of Nebraska and the University of Pennsylvania’s Wharton School, then attended Columbia University. He learned value investing from Benjamin Graham there, which greatly influenced his approach.

Graham, the father of value investing, taught a security analysis course Buffett attended. Impressed, Buffett worked at Graham-Newman after graduation. During the 1950s, he honed his value investing skills under Graham’s mentorship, which shaped his investment philosophy.

Early in his career, Buffett successfully invested in stocks like GEICO and Rockwood. He had a knack for spotting undervalued companies and understanding all perspectives of a trade. This, combined with his value investing principles, laid the groundwork for his future success. In 1956, Buffett launched Buffett Associates, LP, a hedge fund that would evolve into the multinational conglomerate Berkshire Hathaway.

Evolution of Warren Buffett’s Strategy:

Warren Buffett kept perfecting his answer to the question of how to invest. His investment strategy has evolved over his career despite a consistent focus on value investing. Initially, Buffett followed a “cigar butt” investing strategy, as taught by Benjamin Graham. He would find companies in distress but still had some value left, extract what he could, and then move on.

As his portfolio grew, this approach became impractical. Influenced by his partner, Charlie Munger, Buffett shifted to a long-term strategy. He started looking for great companies at fair prices, focusing on those with durable competitive advantages, or “moats,” and staying within his circle of competence. For example, he invested in Coca-Cola, seeing the economic moat there- the massive distribution network.

Buffett began investing in undervalued companies with strong growth potential, holding onto them for the long term. He emphasized robust and ethical management, understanding that it contributed significantly to a company’s success.

This shift allowed him to harness the power of compound interest, generating substantial returns for Berkshire Hathaway and its shareholders. Today, Buffett continues this strategy, seeking companies with strong growth potential and durable competitive advantages. He remains committed to value investing, occasionally expanding his scope to include certain technology companies, demonstrating his ability to learn and adapt. His approach has solidified his status as one of the most successful investors ever.

Principles that Guided Warren Buffett’s Investments:

1.    “Never invest in a business you cannot understand.”

Many first-time investors jump into stocks and cryptocurrency without understanding them. Buffett often advises against chasing shiny things and stresses focusing only on familiar opportunities. For example, Buffett avoided technology stocks because he didn’t understand how to value them. Berkshire Hathaway only bought Apple shares in 2016 after truly grasping the business.

2.    Think Like an Owner:

When you buy a stock, you buy a share of its ownership. Now, imagine someone offering to sell you their company for Rs.700 crores. You wouldn’t pay without knowing details like profits, competitive advantages, growth prospects, risks, and capital expenditure. Buffett’s lesson is to focus less on stock price movements and more on the business behind the stock. Analyze the business thoroughly through the ROE, P/E ratio, long-term debt figures, retained earnings, and the company’s economic moat. Invest in one you’d like to own for the next 10 to 20 years. Check Berkshire Hathaway exemplifies this owner’s mindset, with long-term holdings in companies like Coca-Cola, GEICO, American Express, and Wells Fargo.

3.    Steer Clear From Mob Emotions:

During the 2008 economic meltdown, fear cast doubt on long-term business prosperity. Buffett quickly invested in blue-chip companies like GE, Bank of America, Goldman Sachs, Mars, and Dow Chemical, earning over $10 billion by 2013. In his 2018 shareholder letter, Buffett highlighted the advice that seizing opportunities doesn’t require great intelligence or economic degrees but the ability to ignore mob fears and focus on fundamentals. His idea is clear: don’t follow the herd. Strip away emotions in investment decisions to find profitable opportunities.

4.    Let Compounding Work Over The Years:

Warren Buffett understood the importance of time in investing and has reaped the benefits of compounding. Warren Buffett has been invested in Coca-Cola, Wells Fargo, and American Express for over 20 years. He’s held Moody’s for 15 years and Proctor & Gamble, Walmart, and U.S. Bancorp for over a decade. But why wait the years?

Suppose you invested in Company M, which offers a compounded growth of 15% annually. Consider that the company has strong fundamentals and everything is favorable. How much will you earn if you hold the shares for 5 and 10 years?

This is why he focuses on companies he believes will thrive over decades, not just quarters. By holding onto his investments for the long haul, he benefits from compounding growth.

5.    Focus on the intrinsic value:

Every business has its own worth based on its long-term earnings potential and the risks involved. This value, known as intrinsic value, fluctuates over time. It should ideally match what the business can earn over its lifespan, adjusted for inflation and the time value of money. For cyclical companies, future earnings are gauged by averaging past year’s earnings, while steady-growth firms estimate earnings based on growth rates. When valuing a company, check if a stock’s potential return exceeds a bond’s. If it doesn’t,  investing in the bond might be a better choice.

Conclusion:

Remember, Buffett is a maestro, and mimicking his strategies exactly may not be feasible. However, by grasping his core principles of value investing and studying his approach, you can establish a strong base for your own long-term investment path. Buffett’s lessons aren’t complicated. Keep it simple, expand on your knowledge, stick to what you know well, consult a SEBI-registered investment advisory whenever needed, and you’ll find plenty of opportunities to succeed in investing.

FAQs:

• What are the top holdings of Warren Buffett’s portfolio?

Based on the latest 13F filing as of March 31, 2024, the top five holdings are-

• What is the margin of safety?

The margin of safety is the gap between an asset’s intrinsic value and its market price. Being risk-averse, Buffett stresses a substantial margin of safety before investing. This shields his investments from unexpected market shifts and economic downturns, ensuring protection.