Image source: The Motley Fool
It is only a few weeks until legendary investor Warren Buffett is due to step down from day-to-day management of Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B).
His track record has been remarkable. According to Buffett’s most recent letter to Berkshire shareholders, the compounded annual gain of the per-share market value from 1965 to last year was a staggering 5,502,284%.
That compares to 39,054% for the S&P 500 (with dividends reinvested) over the same period.
That S&P 500 number is already impressive to me and I think it demonstrates the power of long-term investing. But the Berkshire number is dramatically better.
The thing is, the stock market has changed a lot since 1965. Could an investor today realistically hope to come anywhere near matching that sort of performance?
Small-scale investing can be powerful
These days, Berkshire’s huge size means that Buffett needs to make massive investments to try and move the needle.
He has lamented that, when he was investing comparatively smaller sums, he had better opportunities to produce higher returns.
He has been reported as saying: “It’s a huge structural advantage not to have a lot of money. I think I could make you 50% a year on $1 million.”
Granted, most private investors would consider $1m to be a significant amount of money. But Buffett’s meaning is clear. Investing on a smaller scale throws up opportunities that are not open to those seeking to put billions of pounds to work.
Berkshire’s record demonstrates that. Between 1965 and 1979, there were two years in which the company’s per-share value more than doubled. Since then, there have been none.
But it is not just how much invested that matters, of course. It is how it is invested.
Stock market information revolution
In some ways, investors have advantages today that Buffett would have loved all those decades ago. Reams of company information is made instantly available online, free of charge. There are also some highly competitive share-dealing accounts available now.
That widespread information dissemination is a double-edged sword though. Other investors can also access it.
However, it can be a powerful tool in helping a private investor as they try to invest like Buffett.
Thinking (and investing) like the Oracle of Omaha
When investing Berkshire’s cash in shares, he has often followed some key principles. As investments like Coca-Cola and American Express show, he likes well-established businesses with proven models and often looks for powerful brands and existing customer bases.
It does not always work. One of Berkshire’s duff investments under Buffett was its stake in Tesco. An accounting scandal led him to sell the shares at a steep loss.
That scandal is long-since resolved, but the episode demonstrated that while Buffett invests for the long term, when he considers material facts to have changed, he reassesses the investment case for a share.
Such an approach seems appropriate for a private investor too, as far as I am concerned.
