Investing Genius

The great man is he who in the midst of the crowd keeps with perfect sweetness the independence of solitude. Emerson.

Such a man is Warren Buffet, who turned 83 this weekend. As investors what can we learn from the investing style of the greatest investor of all time? As it turns out we can learn plenty.

Many books have been written about Buffet, but my personal favorite is “Buffet: The Making of an American Capitalist” by Roger Lowenstein.  Though published in 1995, it still captures the essence of Buffet’s style then and now. The core of his style is to seek and buy value with a margin of safety and to ignore daily market fluctuations.

Another key component of his style is his long-term orientation. When asked what was his favorite holding period, his response was, forever. His recent purchase of rail company Burlington Northern is a classic Buffet move with eyes firmly on the future long-term prospects of rail businesses in the United States. This is a sharp contrast to most money managers today that are focused mainly on the daily gyrations of stock prices.

Of course, one can argue that these days it pays to be short term oriented as the market keeps rewarding speculative behavior. However, there is still a lot to be said in favor of taking the long-term view.  Take as an example, Nestle Nigeria quoted on the Nigerian stock exchange (NSE). If you had invested N1 million in January 2005, excluding dividends, your investment will be worth N9.35 million today.  That is a stunning return especially when you take into account the market meltdown in 2008. Similar analysis reveals excellent returns for GTB and Zenith. The lesson is, as Buffet has shown us, find a great company and keep it for the long term.

Another theme that permeates Buffet’s style is management’s integrity. He only invests in companies whose management he can trust. If you are a speculator, i.e. short term oriented, management’s integrity may not matter significantly as you are out in a flash. However, if you are in it for the long haul, you had better pay attention to management’s integrity. A less than honest management will likely cook the books when things get tough, engage in unethical behavior and get into trouble with regulators etc. Therefore, like Buffet, learn to spot dodgy managers and stay away from their companies. I have been personally burnt by a few on the NSE but have since taken this lesson to heart.

A subtler but often over looked lesson is to avoid investing in sectors that are inherently unprofitable and difficult with low return on capital employed. Buffet recognized this early in his career when he invested in the textile company, Berkshire Hathaway. The textiles business in the United States at that time turned out to be unprofitable. It still is. Apart from Textiles, another sinkhole is the airline business that requires massive amounts of capital with little return. Just look at the privately held Nigerian airlines that are currently neck deep in debt and unprofitable.

Finally, what better testament to the long-term style than Buffet’s success? Consider that he began his partnership in 1956 with $100,000 of his money and money from friends and family. Today he is worth $53.5 billion.  Go figure.

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