Global founder and leader Justin Beeton examines the most successful investor of all time – Warren Buffett – and explains how to replicate his returns
Warren Buffett is the greatest investor of all time arguably. Certainly he gets the best long-term background in creating prosperity for himself and shareholders of his purchase holding business, Berkshire Hathaway.
But Buffett doesn’t have any quirky items like Expenses Gates, nor was he born into prosperity like James Packer. Buffett understands some essential investment principles simply. Buffett describes his principles as mere common sense, yet most who have attempted to replicate his success have failed. The reason for this is that Buffett has extraordinary patience and discipline, never deviating away from his investment formula even when faced with short term market volatility.
“There seems to be some perverse human characteristic that likes to make easy things difficult,” he has been quoted mainly because saying.
And he is also counter-cyclical, advising that others are getting fearful “when, be greedy”. In 2008 at the elevation of the American banking crisis October, when almost all were fleeing the bank operating system in a panic, Buffett injected $5 billion into US investment lender Goldman Sachs. He negotiated a capital protected offer whereby he could convert his holdings to normal shares at $115 per share anytime over five years, provided that Goldman Sachs stayed running a business, regardless of how low the share price fell. If the share price rose, he’d get all the advantage of the upside profits too. Plus, he negotiated 10% interest on the $5 billion.
Had Goldman gone under, Buffett would have lost his $5 billion. But it didn’t – it’s currently trading at $170, indicating Buffett is sitting on a paper income of almost $US3 billion accumulated in just over 12 months.
Since the share market lows of early 2009, many Berkshire Hathaway holdings have recorded similar extraordinary performance:
Goldman Sachs +60%
American express +325%
Wells Fargo +265%
H&R Block +59%
Moody Corp +70%
Washington Post +52%
Yet Berkshire Hathaway shares have significantly underperformed the market.
What this means is that – according to my analysis – the best opportunity in the world that meets Warren Buffett’s investment principles is his company itself: Berkshire Hathaway.
Berkshire Hathaway has a proven track record of provided returns to shareholders (27.7% annual returns since 1977), solid management team (Buffett himself) and is trading below intrinsic value.
If you would like to gain access to the same deals at the terms Buffett does, there is no need to reinvent the wheel. All you need to do is buy shares in Berkshire Hathaway.
Herein lies the problem. One A class share in Berkshire Hathaway will cost you US $99,000 at the proper period of writing this content. As you will need US dollars you will encounter yet another risk being currency fluctuations also. There is also the obvious fact Buffett is almost 80, so what will happen to the share price of Berkshire Hathaway when the he does eventually pass away? These are all relevant questions Australian traders must consider when analysing whether to purchase Berkshire Hathaway.
But if you don’t invest in Berkshire Hathaway directly even, you can reap the benefits of Buffett’s genius by following his investment concepts still, which may be consolidated into four guidelines:
Step one 1 – Adopt a focused investment philosophy
Focused investing means selecting just a few companies which may have the capability to create high returns more than the long term. A focused purchase should consist of no less than three different companies, operating in different sectors. This requires discipline and patience to wait for outstanding opportunities.
Step 2 – Invest the bulk of your funds in those few companies
As Buffett says, if you’re convinced of the value of an ongoing company, you should have a sizable investment in it. In case you are correct and the share cost increases significantly, you possess maximised your likelihood of making high returns.
Step 3 – Buy insurance
But imagine if you’re wrong? Or market crash there’s? You can manage this risk by buying insurance – put options – to safeguard our investment. A put option gives you the right to sell your shares at a set price for the term of the insurance, signifying you minimise the chance of what will be a high-risk strategy otherwise.
The maximum risk is the expense of the option now, provided you insure the shares at the price. That’s, the strike cost of the put choice equals your price.
To create this investing style far better even, you may use your investment income to lessen your risks even further.
Step 4 – Use the dividend income to offset insurance costs
If the total dividend income equals the high quality paid for the put option, also if the share cost were to fall after that, your loss could be limited by zero. However, you need to remember that upcoming dividend income isn’t a certainty and you will need to aspect in the costs of brokerage, transaction costs and tax as well.
Regrettably, we can’t all become Warren Buffett. But, by learning from him – particularly his discipline, patience and clever protections against risk – we can invest more successfully and safely, regardless of who we are.