Warren Buffett’s investing style – unmatched for a century – is considered one of the best in the industry. Because of this, many investors want to emulate his strategy either by watching his interviews or reading articles or books about him and his ideologies.
But while the Berkshire Hathaway CEO’s portfolio is good, it’s not the best strategy to follow, especially for companies with less than $10 million in the stock market.
Before you start throwing rocks at this article, here’s an honest assessment of the Warren Buffett investment style – whether it can boost your profits or not as an investor looking to earn in the long term.
An Overview of Warren Buffett’s Investment Style
Warren Buffett was inspired by his professor Benjamin Graham – the economic pioneer behind the widely successful value investing style. Graham emphasised the margin of safety, which focuses on buying stocks at amounts lower than the standard intrinsic value.
But Buffett’s style differs from Graham’s in that he invests money in decently-priced businesses. He also follows a comparably more straightforward strategy that only makes use of four filters.
Compared to Graham, Warren Buffett has a long-term hold on his company stocks and investments. He’ll oversee it for decades – if not for life – compared to the usual investor pattern of just months or years.
Given the simplicity of Buffett’s investment strategy, it’s no surprise that he has amassed much value investing enthusiasts. Like the CEO of Berkshire Hathaway Companies, they purchase popular medium to large-cap companies at a market capital that costs billions.
And while this worked well for Warren Buffett, it is potentially dangerous for new investors.
Assessing the Perils of Warren Buffett’s Style of Investment
The issue is not with the business philosophy but with the people who want to invest using Buffett’s strategy.
Although the investment strategy seems simple, it isn’t easy to employ unless you have Buffett’s experience. And by experience, it means possessing the financial acumen brought about by decades of reading reports and shareholder letters, management know-how, and capacity to assess people.
Remember, Warren Buffett has been doing it so long that he can easily spot stock and industry trends that most investors miss.
There’s also the act of judging businesses and whether or not they’re quality investments. While an investor can spot this out after being told so, you won’t be able to pick it out for yourself.
Again, you need to be like Warren Buffett – an experienced person who has mastered the analysis of competitive advantages – to succeed in this endeavour.
Unfortunately, even seasoned investors like Seth Klarman admit to the difficulty of judging businesses’ competitive advantages.
As a new investor, it’s also hard to make accurate calculations. You can easily go off on a small margin with any of your assumptions for cash flow. And even if it’s only a small figure, it could change the intrinsic value or price by a wide margin.
Given these perils, you should honestly assess your investment capacities. Can you do an accurate discounted cash flow calculation?
Although there’s a margin of safety for the mistakes, you might commit, overestimating company value can lead to significant losses!
Should Investors Imitate Buffett’s Investing Strategy?
The answer is both YES and NO.
While some investors will benefit from the investment philosophy popularised by Buffet, it’s unlikely to yield profit for a new, small-time investor like you.
Remember, Buffett is no longer following the financial advice developed by Graham as his company portfolio has grown too large to use the Economics professor’s tactics.
Despite this, the money that Buffet has was borne out of Graham’s strategy. In the 1950s to 1960s, this investment partnership helped him earn a whopping return of 20%.
After abandoning the investment strategy put forth by Benjamin Graham, it’s evident that the returns of the Berkshire Hathaway CEO have significantly decreased. Although his money management tactics are successful, he is quick to point out that Graham’s tactics are still best for small amounts of money.
In fact, this was the focus of his GuruFocus interview. According to Buffett, he considers his financial growth in the 1950s as one of the key parts of his life.
With the help of Graham’s philosophy, he earned 50% earnings plus returns despite only working on a small capital.
The Investment Philosophy Even Warren Buffet Promotes
As mentioned, Buffett’s investing tactic will work for some but not for most. For one, you need to have a great deal of skill and experience in assessing business companies for the tactic to bear fruit.
Likewise, it would help if you considered the capital you wish to invest. If it’s less than $10 million, it’s best to follow the value investing philosophy of business management expert Benjamin Graham. Like Buffett, this will help bring the best returns for your company.
