The Oracle of Ohama: Way of Warren Buffett

ZodiacTrader
7 min readMay 20, 2024

Warren Buffett, the “Oracle of Omaha,” is not merely a successful investor; he is a phenomenon in the financial world.

Over decades, Buffett has shown an unparalleled ability to read market signals, making investment decisions that have often defied prevailing wisdom yet returned incredible profits.

As the chairman and CEO of Berkshire Hathaway, Buffett transformed a faltering textile mill into a behemoth that owns scores of businesses and holds substantial investments in major companies like Apple, Coca-Cola, and American Express. This article delves into Buffett’s journey from a precocious young investor to a global symbol of success and wisdom in investing.

Early Life and Education

Warren Edward Buffett was born on August 30, 1930, in Omaha, Nebraska. From selling chewing gum and Coca-Cola bottles door-to-door to delivering newspapers, young Buffett was always looking for ways to earn.

His father, Howard Buffett, was an influential figure, serving four terms in the United States Congress and running his own brokerage firm. This environment introduced Warren to the world of stocks and investment.

At 11 years old, Buffett made his first stock purchase, buying three shares of Cities Service Preferred at $38 per share. The stock fell to $27 but eventually climbed to $40, and Buffett sold with a small profit. However, the stock soared to nearly $200 shortly thereafter. This experience taught him the first of many lessons in patience in investing.

Warren Buffett’s Mentor- Benjamin Graham

After high school, Buffett attended the University of Pennsylvania’s Wharton School for two years before transferring to the University of Nebraska, Lincoln. Despite working full-time, he graduated in only three years, having accumulated $9,800 in savings (about $105,000 today).

Buffett’s time at Columbia Business School was transformative, as he studied under Benjamin Graham, whose book “The Intelligent Investor” profoundly influenced his investment strategy. Graham’s concept of “value investing” — focusing on undervalued stocks that the market has overlooked — became the cornerstone of Buffett’s career.

Career Beginnings

After Columbia, Buffett returned to Omaha and worked as a stockbroker while teaching investing principles at night. Dissatisfied with just selling stocks, he started the Buffett Partnership Ltd. in 1956 with $100,000 from family and friends. He focused on undervalued companies, using detailed research to invest where others saw no value.

An early example of his acumen was his investment in a troubled textile company, Berkshire Hathaway. Buffett slowly took control of Berkshire, despite its declining textile business, recognizing the opportunity to repurpose it as a holding company.

Warren Buffett and Charlie Munger

Formation of Berkshire Hathaway

Under Buffett’s leadership, Berkshire Hathaway diversified far beyond its textile roots. He steered the conglomerate into insurance, buying National Indemnity and GEICO, and later into media, energy, and food and beverage industries, among others.

One of Buffett’s significant early moves was investing in American Express in 1963 during a major financial scandal that had halved its stock price. Recognizing the enduring value of the brand and its position in the financial services industry, Buffett’s investment paid substantial dividends as the company recovered and flourished.

Investment Philosophy

Buffett’s philosophy is simple yet profound: “Invest in what you know,” and “be fearful when others are greedy, and greedy when others are fearful.”

His approach emphasizes long-term opportunities over short-term trends, focusing on businesses with durable competitive advantages, known as “moats,” and strong future prospects.

He advocates buying into companies at a price that makes economic sense and holding them indefinitely.

1. Understanding the Business

Buffett insists on investing in businesses that he understands thoroughly, often referred to as staying within one’s “circle of competence.” This means he focuses on companies whose business models are straightforward, predictable, and sustainable over the long term. He avoids companies with complex technologies or markets he does not fully understand, as evident in his initial reluctance to invest in the tech sector until much later in his career when he invested in Apple and IBM.

2. Economic Moat

A company must have a durable competitive advantage, or “economic moat,” that can sustain long-term profitability and defend against competition. This could be a strong brand identity (like Coca-Cola), proprietary technology (like IBM), regulatory barriers (like utilities), or scale advantages (like Walmart). Buffett’s focus on economic moats ensures that his investments can withstand economic downturns and competitive pressures.

3. Management Quality

Buffett places a high premium on competent and trustworthy management. He believes that even the best business can falter if the leaders are not up to the task. Therefore, he assesses management for their integrity, commitment to the business, and their ability to deliver results. Buffett’s decision to invest in a company often hinges on his confidence in its leaders.

4. Financial Health

The financial fundamentals of a business are crucial in Buffett’s assessment. He looks for companies with a consistent record of profitability and strong return on equity, with high profit margins and low debt. He also values companies that generate significant free cash flow, which indicates a company’s ability to reinvest in its business, reduce debt, pay dividends, or repurchase stock.

5. Long-term Perspective

Buffett is famous for his long-term investment horizon. He believes in buying companies at a fair price and holding them “forever,” as opposed to trading stocks based on market fluctuations. This approach not only aligns with his investment strategy of compounding returns over time but also minimizes transaction costs and tax liabilities, which can erode investment gains.

Margin of Safety

A fundamental principle in value investing, the margin of safety involves purchasing securities when their market price is significantly below their intrinsic value.

By doing so, investors protect themselves from significant losses in cases where their analysis proves incorrect. Buffett’s investment in American Express during the 1960s is a prime example, where he bought shares during a temporary crisis at a price well below the company’s intrinsic value.

Market Psychology

Buffett often highlights the importance of being fearful when others are greedy, and greedy when others are fearful.

This contrarian approach requires understanding and acting against prevailing market sentiments. It’s about capitalizing on market irrationality when fear or euphoria drives prices away from their true economic value.

Practical Examples of Buffett’s Philosophy

  • Coca-Cola (Economic Moat and Long-term Perspective): Buffett’s investment in Coca-Cola in 1988 exemplified his strategy of buying great companies at a fair price. He recognized Coca-Cola’s global brand and dominant market position as a powerful moat that could ensure long-term profitability.
  • GEICO (Understanding the Business and Management Quality): Buffett understood the insurance business deeply and recognized GEICO’s potential early on. He also trusted in the management’s ability to turn the company around from its troubled times in the 1970s.
  • Burlington Northern Santa Fe, LLC (BNSF) (Financial Health and Long-term Perspective): His purchase of BNSF in 2009 showcased his belief in the long-term prospects of the American economy and the crucial role railroads play in it. This investment also reflected his confidence in the company’s ability to generate consistent cash flow and maintain financial health.

Investment Methodology

Buffett uses a set of stringent criteria to evaluate potential investments:

  1. Economic moat: Businesses should have a long-term competitive advantage.
  2. Management quality: Leaders should be competent and honest.
  3. Financial health: Companies must have consistent earning power and high profit margins.
  4. Valuation: Stocks should trade below their intrinsic values.

An example of this in action is his investment in Coca-Cola in 1988, following the stock market crash of 1987. Buffett bought a significant stake at a price that seemed high to many at the time. However, looking at the company’s global brand and market, he predicted a much greater long-term value. Today, this investment remains one of Berkshire’s most profitable.

Leadership and Management

Buffett’s leadership at Berkshire Hathaway is characterized by autonomy and minimal interference. He believes in hiring the right people and giving them the freedom to operate their businesses. This decentralized approach has allowed Berkshire to maintain a small headquarters staff while overseeing a vast empire of businesses.

Philanthropy and Personal Life

Buffett has pledged to give away over 99% of his wealth. In 2006, he committed to gradually giving all of his Berkshire Hathaway stocks to philanthropic foundations, with the majority going to the Bill and Melinda Gates Foundation. His philanthropic efforts focus on global health, poverty alleviation, and education, reflecting his belief in strategic, impactful giving.

Challenges and Controversies

Despite his success, Buffett has faced criticism. For instance, his investment in airlines, which he once dubbed a death trap for investors, turned sour during the COVID-19 pandemic, leading to significant losses. His stance on avoiding technology stocks was also questioned when he missed the early gains of companies like Google and Amazon.

Legacy and Influence

Buffett’s influence extends beyond his own company.

He has shaped the investment strategies of individuals and funds worldwide. His annual letters to shareholders of Berkshire Hathaway are widely read for insights into economic trends and investment philosophy.

Warren Buffett’s journey offers invaluable lessons on investment and life. His disciplined approach to investing, profound respect for corporate stewardship, and philanthropic legacy will influence generations to come.

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