What makes Buffett so great as an investor? There are several things he does well and a strategy he uses consistently. One of them I have yet to see pointed out in any of the Quora answers which is a shame as it is one of the MOST important advantages he has. Reading his investor letters over the decades makes this clear.
Buffett made an incredibly smart move early on in his investing career buying all of Geico Insurance. This is the one key part of everything he has done that has made his returns so above average and the one strategy everyone here has failed to point out.
So why is this such a big deal? Well imagine somebody gave you an ever growing amount of money that cost you anywhere from zero to giving you a bit of profit every year? This amount has grown into the 10’s of billions for Buffett. In the insurance industry it is known as “float”.
Float is what insurance companies take in as premiums but don’t have to pay out until later as claims. When you have growing customers and premiums your “float” just keeps getting larger and larger as far as the eye can see. So what happens when you have a zero cost of capital and billions of dollars? You can invest it in relatively safe stocks or purchase entire companies with decent returns and magnify your gains. It is like using margin in a brokerage except your cost of capital is zero or even negative (you get paid for the float in years Geico is profitable!).
This one move was the biggest genius in Buffett’s strategy. Take this away and the picture would be very different today. It was brilliant. Matter of fact I see it in another company today but taking a slightly different form. Amazon! They make very little profit from the retail business but take in money today and pay vendors much later. As they grow the top line fast their float grows and is also in the 10’s of billions.
Bezos lays down bets and investments just like Buffett using Amazon’s float from retail in hopes of some of them paying off big. AWS is one of the winners that now is over half the profit. He is making other bets like Echo, Prime Video, Physical bookstores/grocery stores, acquisitions like Zappos and many others. Bezos’ has made his retail business a provider of free float to invest in other areas. But I have slightly digressed. Onto Buffett…
Buffett had to make smart investment decisions with this free float otherwise it would not have paid off so handsomely. He has invested in his core areas of expertise and knowledge. His “circle of competence” as he called it. He bought only companies he knew and understood and stayed clear of ones that he felt were just too hard.
He mastered his emotions. Investing isn’t about high IQ. If it was every smart person would be a billionaire. It is about emotions more than intelligence. Humans are hard wired for fight or flight. In the face of fear and loss they sell stocks. They say they won’t but in the heat of the battle they do. The brain is wired that way. It takes a certain breed to be buying when the world is selling.
Try it next time the market is down 10% or 20% plus. You say you will but when the time comes you will either be selling or saying “I’ll wait until it falls a little more or bottoms and then I will buy”. Inevitably, you will wait until it has bounced and recovered and possibly near highs again.
Buffett learned from Ben Graham and David Dodd the art of value investing. This was the strategy to buy stocks at a discount with a margin of safety. Later he learned from his partner Charlie Munger and also Phil Fisher that it was ok, if not better, to buy a great company at a fair price and not necessarily a discount.
Buffett does not day trade
Buffett does not use charts and scoffs at those who do.
Buffett tends to hold stocks for long periods allowing them to compound without taxes denting the returns
Buffett has 2 rules of investing:
- Rule #1 never lose money
- Refer to rule #1
Buffett will stick to his strategy regardless of what the crowd is doing. In the internet bubble he was written off as a has been. An old guy who could not understand the great new world. Internet stocks were roaring and he didn’t buy one of them. The world had passed Buffett by. After 2000 and the dotcom crash Buffett was the last guy standing. His Berkshire Hathaway had once again outperformed over the beginning and ending period of the dotcom era.
Buffett does not let politics enter into his investment timing or decisions in any way.
Buffett does not worry about economics. He does not make macro calls. He does not try to predict what the economy will do or the market over the short term. He does not care. He said if he spends 5 minutes a year on economics that was probably 5 minutes too much. So save your time and ignore the noise on CNBC about all the politics or economics. It is a waste of time to think or worry about
Find companies that have wide economic moats. A sustainable advantage over competition. This means strong brands, patents, process or some other moat around the business making it hard for competitors to attack
Buffett invests in companies with solid and reputable management. This is one of his very important rules although I have also heard him say try to invest in a company so strong and good that a monkey could be CEO and run it. Because someday it may have an incompetent CEO where a monkey might be favorable
Buffett also started buying entire companies vs just stocks in companies. Stock is a partial ownership slice of a business but as time went on he preferred to purchase entire companies when possible.
These are some of the main reasons why Buffett was and is such a great investor. If you follow all these rules and points you will be a better investor. Probably not as good as him especially since you don’t have billions in free float. However, if you are really smart just do what he advises and buy the index and take your share of profits in the market. You can be happy by doing so you just beat over 95% of all mutual and hedge funds over just about any 10 year period.
