Wednesday, 22 June 2011

The Genius of Warren Buffet

 Warren Buffet is one of the most successful investors of all time. The numbers speak for themselves. Berkshire Hathaway, Buffet’s holding company has averaged an annual growth rate of 20.3% to its shareholders over the last 44 years. If we compare the company’s returns against the normal stock indices, his performances are even more remarkable. Berkshire Hathaway produced a total return of 76% from 2000-2010, as opposed to a negative return of 11.3% for the S & P 500 for the same period.

So how does Warren Buffet make so much money for his shareholders? Buffet is a discipline of Benjamin Graham, and his system of value investing. At its core, this is a system of investing whereby a company is purchased at a price which can be considered under valued. Needless to say, buying companies at good prices is not an easy activity, but requires endless patience to wait for the right moment. Unlike most fund managers who are passive investors, Buffet is an active investor. But, Buffet does not just buy a small shareholding in a company, like most fund managers, he will often buy the whole company. By this method, he can exert a decisive influence on how the company is managed.

Many of Buffet’s early company purchases were insurance companies, which are effectively, if well managed,  money machines because they receive great quantities of cash by means of insurance premiums. But, today Buffet’s principles of management have been spread to a whole range of companies including railroads, confectionery, retail, home furnishings, encyclopaedias, manufacture of vacuum cleaners, jewellery sales; newspaper publishing; manufacture and distribution of uniforms; as well as several regional electric and gas utilities.

So what are the principles Buffet uses to manage the companies he owns? Buffet leads from the front with everything he does, by setting a personal example. This immediately cuts out excesses in salaries and management expenses. His own salary is fixed at $100,000 and has remained the same for many years, despite being one of the richest men in the world. His companies also eschew debt as much as possible. Buffet creates the right balance in his companies between the major interest groups of shareholders, management and employees.

Buffet employs serious professional management who are given the freedom to manage the companies for the long term according to the principles established by him. They are accountable to him for the management and results they produce.

Buffet only invests in companies he knows and understands. He sticks to his guns through thick and thin and does not let himself be distracted by market reactions or criticism of his way of investing. During the Dotcom boom Buffet was widely criticised by many critics who argued he had not only missed the technology boom, but also that he had not adapted his methods to the ‘new market dynamics’. The subsequent crash of technology companies showed that all companies have to abide by the same rules, and that some technology companies can also become obsolete and worthless very quickly.

Buffet has shown beyond all doubt that his principles work over long periods of time, and many other investors could do no better than to heed his wise words and methods of investment.

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