"Can I achieve the same rate of return as Buffett?" A student once asked me this question.
Over the past 50 years, Buffett's annualized rate of return has been nearly 20%. If someone had invested 10,000 USD in Buffett's holding company, Berkshire Hathaway, back then, it would have grown to 180 million USD today... How I wish your grandfather had bought you a share back then.
Many books discuss Buffett's investment techniques. Some books tell you that Buffett's method involves choosing stocks with high ROE (Return on Equity), while others suggest choosing stocks with a durable competitive advantage and a strong moat.
These answers are not wrong, but they are not complete! If it were just these factors, then anyone could become a stock market guru.
A closer study reveals that most people only see Buffett's investment approach after he turned 50 and overlook the strategies he employed when he started at 26.
Therefore, what sets Buffett apart from Retail Investor?
Let's find out...
Why is there no second Buffett in the world? Since he has five special competitive advantages.
In fact, Whether for retail investors or other fund managers, it's quite challenging to completely replicate Buffett's investment approach, and there are five main reasons for this:
1. Warren Buffett not only engages in investments but also has a strong penchant for "acquisitions," acquiring complete "control" of companies.
While most people buy stocks merely to obtain shares, although they receive dividends, and cannot participate in the company's decision-making, Buffett, by gaining control of companies, not only shares in the profits but also enjoys many "additional benefits." These include the authority to appoint top-level executives and the freedom to choose managers whom Buffett deems most suitable.
Another typical example is Buffett's acquisition of "float" in the insurance industry. Float is the idle capital held by insurance companies reserved for paying insurance claims. However, for Buffett, utilizing these funds for investments represents zero-cost financing, assisting Buffett in achieving higher returns.
2. With its distinctive "non-intervention" acquisition approach, securing transactions at prices more favorable than the market.
Buffett has a penchant for acquiring top-notch companies, and unless necessary, he prefers not to interfere with their operations. The challenge lies in the fact that outstanding companies aren't necessarily eager to sell, therefore what kind of companies seek him out?
If it's an excellent family business in need of cash while desiring to retain operational control, rather than selling to other high-bidding acquirers, it's preferable to sell to Buffett, ensuring non-intervention. This allows Buffett to acquire companies at relatively lower prices.
Getting a better deal than others and saving effort!
While this approach identifies extremely scarce investment targets (perhaps less than one per year), it yields remarkably high returns!
3. Boasting an exceptional executive management team.
While many companies, during acquisitions, often undergo significant overhauls of their leadership teams, replacing the acquired company's personnel with their own, a practice that was widely popular in the 1980s, Buffett typically refrains from such actions. Alongside gaining operational control, he places significant emphasis on the acquired company having an outstanding executive management team, considering skilled managers to be quite rare.
Having exceptional managers comes with numerous advantages. Firstly, in the case of Berkshire Hathaway, with over 400,000 employees across its subsidiaries, the corporate headquarters operates with a lean team of only 24 individuals. This efficiency is possible because these subsidiaries are led by outstanding managers capable of handling the responsibilities.
Secondly, there's a high level of stability. The selection of these managers doesn't rely on predicting success based on business school performance. Instead, it involves observing real-world results from existing successful businesses. Therefore, the chosen managers have already proven themselves in practical situations and are highly reliable.
4. Vast deployable capital and steadfast Berkshire shareholders.
On a global scale, Berkshire Hathaway is likely the only entity capable of directly pulling out $5 billion for corporate acquisitions. This provides Buffett with a significant advantage.
During economic downturns, when many stocks present optimal buying opportunities but most individuals lack sufficient funds, numerous funds face significant redemptions, leading to a shortage of deployable capital. Typical investors often refrain from entering the market due to losses and fear.
Berkshire's unique advantage lies in the fact that most shareholders are exceptional value investors who have immense trust in Berkshire and Buffett. They understand that every major market downturn is an excellent buying opportunity. As a result, they do not sell Berkshire stocks indiscriminately (Berkshire's stock turnover rate is lower than many large-cap stocks), ensuring the firm's foundation remains exceptionally stable.
Berkshire does not distribute dividends. During the 2016 Berkshire Hathaway annual meeting, Buffett mentioned that the annual cash flow of $10-20 billion should avoid being returned to shareholders to prevent substantial tax implications. Instead, it is preferable to reinvest the funds to defer income tax and generate greater returns.
Additionally, a substantial influx of cash flows from various businesses each year, along with the insurance industry's inflow of float, ensures a steady stream of funds for acquiring undervalued companies even during the worst economic conditions!
5. Buffett himself is also a significant advantage.
Warren Buffett, personally, is undeniably one of Berkshire Hathaway's key strengths. This encompasses his acute sensitivity to numbers, exceptional memory, unique understanding of the stock market, and unwavering commitment. With a wealth of experience navigating market fluctuations since the 1930s (now at the age of 87), his longevity and exposure to numerous market cycles allow him to accumulate compounding returns on a grander scale than most. Furthermore, his reputation serves as a distinctive competitive advantage for Berkshire Hathaway, attracting numerous willing acquisition targets seeking to align with his name and expertise.