Warren Buffett is probably the only professional investor who needs no introduction. Over a long and illustrious career stretching back to 1965, he’s produced a mind-boggling 4,384,749% return for investors through his investment vehicle, Berkshire Hathaway. In other words, $100 invested in 1965 would today be worth over $4.3 million. For some context, the same $100 invested in the S&P 500 would now ‘only’ be worth $31,323. 

Investors can of course get exposure to Warren Buffett’s investment expertise by buying Berkshire Hathaway (BRK.B:NYSE) shares, which are listed on the New York Stock Exchange. But Buffett has dropped so many pearls of wisdom over the years that it’s entirely possible for investors to channel the Oracle of Omaha into their own DIY portfolios, though not all his advice is perhaps exactly what you would expect. 

CENTRAL INVESTMENT PHILOSOPHY

Buffett’s central investment philosophy can be summed up in one statement, which Buffett attributes to his long-term investing partner, the late Charlie Munger: It’s far better to buy a wonderful company at a reasonable price than a fair company at a wonderful price.’ This is a far cry from Warren Buffett’s initial forays into money management in the 1960s, when he built a name as a disciple of value investing guru Benjamin Graham, looking for companies that were down on their luck but trading at very cheap valuations. While he is still known as a value investor because of this history, actually Buffett’s investment style is now probably better described as what the fund management industry calls GARP, or Growth at a Reasonable Price.

The basis of this approach is to invest in companies that have strong fundamentals, such as growing earnings, a competitive advantage, a solid balance sheet and wide economic moats which help to buffer them against new entrants on their patch. There is then a valuation assessment to determine to what extent these positive attributes are factored into the current market price. This approach is more nuanced and subjective than being an out-and-out growth or value investors, but as Buffett points out these are two sides of the same coin, because you can’t judge the real value of a company without analysing its growth prospects.

A LONG-TERM APPROACH

Buffett also advocates a long-term approach saying ‘our favourite holding period is forever’. He suggests having a portfolio you would be happy with if the market shut down for 10 years and you couldn’t sell.

It’s not a practical situation investors will ever face, but it’s a pretty good way to think about your portfolio when you’re doing a review. Warren Buffett also says he relishes dividends from the companies he’s invested in, though Berkshire Hathaway doesn’t itself pay a dividend, because Buffett likes to reinvest those payments for future growth. DIY investors can mimic this with the dividends they receive, instructing their platform to reinvest dividends back where they come from, or simply to hold on to them waiting for instructions to invest them elsewhere.

One of the most unusual recommendations provided by Warren Buffett comes from the 2016 Berkshire Hathaway annual report: ‘Both large and small investors should stick with low cost index funds.’ It’s not an uncommon piece of advice to hear, and wouldn’t be out of place if delivered by the late Jack Bogle, the founder of Vanguard and pioneer of index investing.

But it’s a bit of an odd statement coming from a man who has spent six decades successfully beating the market through stock picking. Buffett’s view on active funds probably stems from his antipathy to Wall Street and what he views as short-term investing behaviour. 

Plenty of investors are of course going passive with their investment choices, and these funds have revolutionised investing, offering simple and low-cost exposure to global markets. Though as Buffett notes ‘there are, of course, some skilled individuals who are highly likely to outperform the S&P over long stretches’.

A balanced portfolio can in fact accommodate both these perspectives, using index trackers in markets that are hard to beat, and active funds where investors have a great degree of conviction in their skill, or in areas that are less well served by passive funds such as smaller companies or income investing.

A CRYPTO SCEPTIC

One more recent Buffett proclamation which might also be of interest is a rather unambiguous view on crypto, which he describes as ‘probably rat poison squared… I can say almost with certainty they will come to a bad ending’. Nuff said.

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