For every $1,000 invested in Berkshire Hathaway (BRKA) in 1964, an investor would now have a tidy $8 million in value, if that investor had held the stock for the full 45-year period. The annualized return on book value is 20.3%, and the annualized return at the market price would be 22%.
The S&P 500 market price return for the same period is 9.3%, and the two largest mutual funds, Fidelity’s Magellan fund (FMAGX) and Templeton Growth Fund (TEPLX) returned 16.3% and 13.4%, respectively. They were the only investments that we even close.
More words have probably been written about Warren Buffett and his investment strategies than any other investor in the past half century. His main strategy has been to buy and hold and hold and hold again.
Besides its simplicity, his strategy follows a key insight from one of history’s gfreat thinkers, who was once asked to name the most powerful force in the universe. Einstein’s answer was, “Compound interest.”
Another part of Buffetft’s success comes from his view that Bershire shareholders are owners, not merely investors, and that view fosters the very long term approach that Buffet believes in. Of course, he also has an advantage over mutual funds because he has more freedom to sit still than do mutual fund managers who need to be good stock pickers in order to generate annual returns.
Buffett is also not averse to admitting that he makes mistakes. His investment in NetJets has cost Bershire shareholders $157 million over 11 years. Likewise, his decision to issue Geico credit cards also cost his investors $44 million. He also admits that his badly-timed investment in ConocoPhillips “has cost Berkshire several billion dollars.”
But into every life a little rain must fall. The trick is to keep the light rain from turning into a monsoon.
His recent decision to go all in on the Burlington Northern Santa Fe (BNI) to the tune of $30 billion is one of those little sprinkles that could turn into a downpour. Buffett paid 18 times earnings for a company that has had an average P/E ratio of 15 for the past 15 years. The railroad business does not offer a high return on capital, of which it can consume large amounts.
What was he thinking? He believes in railroads, and he believes they will produce good, if modest, returns for another century. That also helps explain recent investments in Wal-Mart (WMT), Johnson & Johnson (JNJ), and Procter & Gamble (PG). None is likely to burst out to new heights, but each is a stable company that will help Berkshire weather what Buffet believes are more frequent market storms in the future.
In a more uncertain world, Berkshire’s advantage over the mutual funds will continue to decline. Taking big risks is out, which is why he strenuously opposed the Kraft Inc. (KFT) buyout of Cadbury (CBY). What’s in is a more conservative strategy that is expected to return more consistent growth.
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