Wall Street closely monitors the actions of Warren Buffett, CEO of Berkshire Hathaway, due to the company’s long-term outperformance of the S&P 500 index. Many may assume that investing like Buffett involves hitting home runs with every stock pick, but there are nuances to his strategy that are important to understand.
Berkshire Hathaway operates as a conglomerate, owning a diverse range of 189 subsidiaries across various industries, from electricity generation to paint manufacturing. Additionally, the company holds a portfolio of publicly traded stocks. Buffett’s investment strategy entails acquiring quality businesses at attractive prices, enlisting competent management, and intervening only when problems arise.
The structure of Berkshire Hathaway is comparable to a mutual fund managed by Warren Buffett. Investing in Berkshire effectively places Buffett in charge of managing one’s investments, though he advises against expecting excessive returns.
In Berkshire Hathaway’s 2024 annual report, Buffett offers insights into the portfolio, describing it as a mix of “a few rare gems, many good-but-far-from-fabulous businesses, and some laggards.” Given the amount of investments, it’s realigning expectations to know not all would be exceptional. This highlights a key lesson for investors: a balanced portfolio with a few standout investments, some adequate ones, and minimal poor performers parallels Buffett’s approach.
Buffett credits his success to long-term investing, allowing for growth in businesses, and minimizing substantial mistakes. The investment strategy echoes a concept from tennis, where victory often comes from reducing errors, suggesting that a similar approach could improve investment outcomes.
To minimize mistakes, Buffett suggests most investors might do better by investing in an S&P 500 index fund, allowing them to focus on saving, which significantly impacts long-term wealth. For those investing in individual stocks, maintaining realistic expectations is essential.
Building wealth long-term requires securing several successful investments, a mix of average ones, and a minimal number of failures. Emphasizing the importance of avoiding poor companies, investors should differentiate between companies and their stock prices; market underpricing due to temporary issues can present opportunities. However, genuinely troubled companies, whether due to high leverage, weak business models, or inadequate management, should be avoided.
Investors are encouraged to commit to high-quality companies and quickly rectify investment errors. By doing so, they can ensure their portfolio remains strong, much like Buffett’s, with a collection of valuable investments, some average ones, and few underperformers, thereby increasing wealth over time.
