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 Buffet 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
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
||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
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 "Gates-Buffett 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
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
Buffett and Berkshire bagged those gains by taking major
stakes in large and stable businesses such as
The Washington Post Co. (
, Salomon Brothers and
. 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
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 (
, 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 (
, for example, have become larger components of his portfolio in
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 (
) 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 (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 (KIE)
, is a solid choice, with a reasonable 0.35% expense ratio.