In any given year, an up-and-coming fund manager is able to make some great investment moves, propelling him to the top of the annual leaderboard. But only a select few have the vision and the skill to lead the pack for decades at a time.
The Oracle of Omaha might be the best of them all.
Over many decades, Warren Buffett has made his clients huge sums of money -- and equally important -- has helped them to avoid losing lots of money when the broader market slumps. Just how awesome has he been for shareholders? His portfolio has outperformed the S&P 500 in 24 of the past 30 years. In that time, he's garnered an 18% annualized return, compared to an 11% annualized return for the S&P 500.
Most impressive of all, Buffett doesn't rely on some secret formula. While other investment pros talk about their "black box" approach to investing, Buffett's investment approach is remarkably straightforward -- and can be copied by almost any investor.
Warren Buffett's Biography
After getting his MBA in 1951 from the University of Pennsylvania's Wharton School of Business at the ripe old age of 21, Buffett worked at various investment firms, though he's known more for his focus on the insurance business than any particular affiliation with a major Wall Street firm.
Why insurance? Because it's a steady, predictable business that generates respectable annual cash flow in any economic climate. Buffett learned that lesson after reading up on the most noteworthy figure in value investing -- Benjamin Graham, who along with David Dodd in 1935 wrote "Security Analysis," which is perhaps the most widely read book in the modern era of investing.
|Buffett's portfolio has outperformed the S&P 500 in 24 of the past 30 years.|
In a bid to learn from the master himself, Buffett began working for Graham's investment firm in 1952. Later that decade, Buffett went out on his own, launching Buffett Partnership Ltd. He was just 27 years old. By 1962, he was worth more than $1 million.
After taking the helm of struggling textile firm Berkshire Hathaway (NYSE: BRK) in the mid-1960s and turning it into an investment company, Buffett's steady hand helped the company to boost book value at Berkshire at a 21% annual clip for the next 40 years.
By 1990, Buffett entered into the billionaires club, and by 2008, he was deemed the richest man in the world, with $62 billion in assets. Yet these days, Buffett is more interested in shedding his wealth. Though he's given vast sums to a range of charities, his primary philanthropic focus is the Bill and Melinda Gates foundation, which stands to eventually receive tens of billions of dollars of Berkshire Hathaway stock. Buffett and Bill Gates have teamed up to promote their "Giving Pledge," which calls on other wealthy people to pledge at least half their fortune to philanthropy.
Buffett's also not shy when it comes to espousing his political and social views. He has strongly advocated for a change in tax policies so hedge fund managers can't shield their income through lower capital gains income tax rates. He's also an outspoken critic of the health industry, which he believes costs too much and delivers inferior outcomes. Medical industry lobbying and costly end-of-life medical choices are his two main areas of concern.
Buffett's Investment Strategy And Big Wins
Investors can bag Buffett-like returns by following two simple maxims. First, focus on companies that have a long track record of steady and strong cash flow, and make sure that they are fairly well-insulated from new competition or technological obsolescence.
The second maxim is harder to follow and requires a great deal of resolve. You must be bold when the market and the economy reach their scariest moments. By keeping cash in reserve, you should counterintuitively load up on stocks right at the times of peak selling. Warren Buffett relishes those moments, and so should you.
Buffett and Berkshire bagged those gains by taking major stakes in large and stable businesses such as The Washington Post Co. (NYSE: WPO), Salomon Brothers and Coca-Cola (NYSE: KO). These firms shared a few key traits: They all produced prodigious cash flow, and they all had a fairly wide competitive moat around them.
Buffett's focus on value means he can still generate upside even when the broader market fails to rise. For example, from 2007 through 2011, the S&P 500 lost 1% of its value -- but shares of Berkshire Hathaway rose an impressive 42%, according to GuruFocus.com.
Buffett's $34 billion acquisition of railroad operator BNSF in early 2010 is emblematic of his bold style. He was one of the first major investors to realize that railroad firms had been making badly needed infrastructure investments that would eventually lead to robust growth and solid cash flow. BNSF generated $6 billion in operating cash flow in 2012 for Berkshire Hathaway, and a slate of current investments to improve the railroad's network is expected to lead to higher freight volumes and higher cash flow in the years to come.
Warren Buffett's Portfolio: What's He Holding Now?
Though Berkshire Hathaway now has stakes worth hundreds of millions of dollars in many companies, the firm has more than $10 billion in just a handful of top holdings.
Berkshire's Current Portfolio
Davita Healthcare (NYSE: DVA), which operates a national chain of dialysis centers, has been an increasing focus for Buffett in recent quarters, leading some to conclude that he'll eventually seek to acquire the entire company. Buffett also tends to keep buying more stock of companies he already owns -- as long as they remain attractively priced in relation to cash flows. Wells Fargo (NYSE: WFC), DirecTV (NYSE: DTV) and Wal-Mart (NYSE: WMT), for example, have become larger components of his portfolio in recent quarters.
If history is any guide, Buffett and his team of analysts at Berkshire are getting close to making some sort of major move: Every few years, the company makes a major acquisition that deepens the foundation of cash flow. In 2009, Berkshire paid more than $40 billion to acquire railroad firm BNSF. Since then, solid cash flow has rebuilt Berkshire's short-term cash balance back up to $48 billion. That money is just itching to go to work, setting the stage for yet more gains for Warren Buffett's portfolio.
Action to Take --> If you'd like to follow Buffett's approach but find it challenging to find the right companies that meet his criteria, you can buy shares of exchange-traded funds (ETFs) that tend to hold stocks with strong cash flow. For example, health care providers (such as DaVita Healthcare, Buffett's current favorite) often generate strong cash flow and trade for reasonable cash flow multiples. The iShares Dow Jones US Healthcare Provider (NYSE: IHF) is a solid choice and carries a reasonable 0.46% expense ratio. Insurers are also always a favorite of Buffett's, and the SPDR S&P Insurance ETF (NYSE: KIE), is a solid choice, with a reasonable 0.35% expense ratio.