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Some Lessons To Take From Warren Buffett and Berkshire

5 May 2008 4 Comments

Anybody with even the smallest investing experience knows the name of Warren Buffett. While there have been massive amounts of analysis over his record and investing strategy, I’d like to focus on just a handful of notes regarding the legendary investor and his company, Berkshire Hathaway.

In a previous article, I imparted the 20s Money Retirement Plan. In this plan, I mentioned that you will probably need to outperform the market to accomplish your goals. Taking a look at some characteristics of Warren Buffett is a great way to learn how to outperform the market. Let’s take a look.

The High Share Price

Most people look at the A shares of Berkshire Hathaway as those ridiculously expensive shares trading at over $100,000 each. The question is why has Buffett decided to go the route of never splitting his shares when it seems most other companies continue to split their stock to keep the share price under $100. Buffett has explained that the high share price reduces the number of short term traders of Berkshire Hathaway and emphasizes long term investing in the company. The result? The most loyal shareholders of any company. Want proof? At the 2008 annual meeting in Omaha just last week, over 30,000 shareholders gathered to be a part of the event.

Such a following of investors is truly rare and it is interesting to note the correlation between the high share price and the following Berkshire Hathaway and Warren Buffett have generated. Buffett’s investment strategy is clear as he encourages long term investing through his high share price and demonstrates the same through his actions. His record speaks for itself and his strategy is clear. Let’s implement this strategy in our investing journey.

As young investors, we want to build positions in strong companies with a long-term perspective. Buffett completely avoided the dot com boom in the late 90s. He missed out on a myriad of potential gains but he also missed out on the dot com bust that killed so many “expert” portfolios. We should follow Buffett’s example of not getting caught up in the latest trend but sticking with proven companies for the long term. This is a strategy that leads to outperforming the market. What are trends we should avoid today? I am wary of the alternative energy sector- specifically solar energy. A good question to ask yourself is, “Would Buffett invest in this industry or this company?”

The Cash Position of Berkshire Hathaway

Another characteristic of Buffett’s company doesn’t receive notable attention is their large cash position. The over $35 billion in cash on the balance sheet of Berkshire Hathaway shows an important aspect of Buffett’s investment strategy. Just because he has the money does not mean that he invests it. Buffett is legendary for finding valuable buying opportunities for exceptional companies, and waiting patiently when those opportunities are not present.

Young investors need to begin saving as soon as possible. Your future depends on it. When it comes to dumping that saved money into investments, however; you can wait and you should wait. Just because you have a couple thousand dollars does not mean you should jump into some Apple (AAPL) stock immediately. First you should target some companies you would like to own for the long term, and second, you should not buy until an appropriate buying opportunity presents itself. Buffett would rather hold cash than invest at a wrong time. You should do the same.

While market timing is near impossible, you can find good buys. 20s Money will partner with you to recognize great buying opportunities in strong, proven companies. Buying at the right time and eliminating buying at the wrong time is extremely important. This simple principle will do more for you in your quest to outperform the market and generate high returns than anything else.

As you begin researching actual investments and especially buying opportunities, don’t forget the wise advice of Buffett himself: “Be greedy when others are fearful, and be fearful when others are greedy.”

4 Comments »

  • Allen Taylor said:

    Nice writing. You are on my RSS reader now so I can read more from you down the road.

    Allen Taylor

  • Hip Hop Mens Jewelry said:

    just a detail, from a lazy person: can you keep links/make linkage to each post? when I cannot read posts in one week, then I could follow the link directly to the one that interests me, instead of searching for all…