Warren Buffett's Investment Approach: From Criticism to Lauded Success and Key Lessons

Warren Buffett, the renowned CEO of Berkshire Hathaway (BRK.A, BRK.B), is likely a familiar name to many. His impressive long-term record in investing is remarkable. As highlighted in his 2024 letter to shareholders, Berkshire Hathaway has averaged annual gains of 19.9% from 1965 to 2024. This astonishing performance translates to an overall gain of 5,502,284%, meaning that an initial investment of just $1,000 could have grown to nearly $45 million! For comparison, the S&P 500 index achieved an average annual return of 10.4% during that same period.

Despite his accolades, Buffett's investment strategies occasionally come under fire, typically during bullish markets when growth stocks eclipse Berkshire's performance.

Critiques of Buffett's Strategy

Even respected publications like The Economist have posed questions about Buffett's strategy. For instance, in September, an article noted that Berkshire's annual return averaged 13% between 2009 and 2023, while the S&P 500 averaged 15%. Buffett himself has acknowledged that, due to Berkshire's substantial market value—currently around $1 trillion—its growth rate may not keep pace as it did in the past. Nevertheless, Buffett's performance has recently surpassed the S&P 500; in 2024, it posted a return of 25.5% compared to the index's 25%. Furthermore, in 2022, Berkshire managed a 4% gain while the S&P 500 experienced an 18% decline.

In August, Andrew Bary from Barron's expressed concerns that Buffett was becoming overly cautious by selling stocks and increasing cash reserves, sparking questions regarding his outlook on the stock market and economy.

Despite some viewing Buffett as too conservative—especially as the S&P 500 rose by 2.28% in August and continued to fluctuate—his long-term perspective is what sets him apart. Now, with the S&P 500 down more than 7% recently, Buffett's cautious moves are appearing extremely insightful. Sitting on a wealth of cash, he is positioned to seize opportunities for purchasing undervalued stocks or entire companies.

Reasonable concerns about Buffett have also arisen regarding Berkshire Hathaway's future after his departure. At 94 years old, thoughts of his legacy are inevitable. However, Buffett has strategically prepared for this eventuality by designating Greg Abel as his successor for managing the various businesses within Berkshire and has appointed two investing managers to handle investments.

Lessons from Buffett's Investment Philosophy

There are numerous valuable lessons that investors can learn from Buffett's approach to investing. He has shared several key principles:

Be a Contrarian

Buffett famously advises investors to "be fearful when others are greedy and to be greedy only when others are fearful." This means avoiding the herd mentality and making logical investment choices, like selling off stocks that appear overvalued.

Stick to What You Know

Buffett emphasizes investing within his "circle of competence." Despite the allure of potential high-flying stocks in fields like biotechnology or cloud computing, Buffett won't consider investing unless he fully understands their business models, risks, and possibilities. Although some tech companies now appear in Berkshire's portfolio, his managerial team largely handles these selections.

Don’t Be Afraid to Do Nothing

Investors often feel pressured to be actively buying or selling, but Buffett promotes the value of doing nothing when no opportunities emerge. Continuous learning is essential, but investing in solid companies and allowing them to grow over the years—if not decades—is a viable strategy. As he quipped, his preferred holding period is "forever."

Expect Mistakes, But Learn From Them

Buffett openly acknowledges his investment mistakes. Acknowledging that all investors, including amateurs, will occasionally make errors, it’s crucial to reflect on those errors to minimize the likelihood of repeating them. The more we learn from Warren Buffett, the more adept we can become at investing.

Ultimately, Warren Buffett remains a highly influential figure in the investment world. By studying his strategies and principles, investors can gain invaluable insights and enhance their decision-making processes.

Buffett, Investing, Lessons