Sunday, 22 April 2012

Assessing Buffett. Is Warren Buffett worthy of his reputation?



It might be presumptuous of us to assess an investor who has acquired mythic status, but is Warren Buffett worthy of his reputation? If so, what accounts for his success, and can it be replicated? We believe that
his reputation is well deserved and that his extended run of success cannot be attributed to luck. While he has had his bad years, he has always bounced back in subsequent years. The secret to his success seems to rest on the long view he brings to companies and his discipline—the unwillingness to change investment philosophies even in the midst of short-term failure.

Much has been made of the fact that Buffett was a student of Graham at Columbia University and their adherence to value investing. Warren Buffett’s investment strategy is more complex than Graham’s original passive screening approach. Unlike Graham, whose investment strategy was inherently conservative, Buffett’s strategy seems to extend across a far more diverse range of companies, from high-growth firms like Coca-Cola to staid firms such as Blue Chip Stamps. While Graham and Buffett both might use screens to find stocks, the key difference as we see it between the two men is that Graham strictly adhered to quantitative screens whereas Buffett has been more willing to consider qualitative screens. For instance, Buffett has always put a significant weight on both the credibility and the competence of top managers when investing in a company.


In more recent years, he has had to struggle with two byproducts of his success.

  • Buffett’s record of picking winners has attracted a crowd of imitators who follow his every move and buy everything be buys, making it difficult for him to accumulate large positions at attractive prices. 
  • At the same time, the larger funds at his disposal imply that he is investing far more than he did two or three decades ago in each of the companies that he takes a position in, which makes it more difficult for him to be a passive investor. It should come as no surprise, therefore, that he is a much more activist investor than he used to be, serving on boards of The Washington Post and other companies and even operating as interim chairman of Salomon Brothers during the early 1990s


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