Warren Buffett Archive: Learning and Teaching

Ryann N. Sinclair was a student of Dr. Koch in his Investments and Portfolio Management class at NC State University. In May 2023, Ms. Sinclair is graduating with a degree in Finance. Her LinkedIn profile: link

An Inside Look at the Success of Warren Buffett

By Ryann Sinclair

After watching both the morning and afternoon sessions of the 2012 Berkshire Hathaway annual shareholders meeting, it is evident that Warren Buffett’s unconventional success can be directly attributed to his simple, value-oriented fundamental approach to acquiring and managing investments. More specifically, this paper attempts to further analyze Buffett’s perspective on the dangers of news headlines and external macroeconomic factors, the advantages of market volatility, the nonsense being perpetrated by business schools, the importance of investing in productive assets, and the inherent value of owning companies who hold a competitive position in the market. I chose this specific annual shareholder meeting because I thought it would be interesting to see if Buffett’s overall investment strategy or economic outlook had changed in the years following the 2008 housing crisis.

In the morning session of the annual shareholders’ meeting, Buffett repeatedly emphasized the importance of ignoring the daunting headlines and external macroeconomic factors. More specifically, when asked if systemic risk fears have ever influenced his eagerness to buy equities, Buffett responded by stating, “If we find a business that we think we understand and we like the price at which it’s being offered, we buy it. It doesn’t make any difference what the headlines are, it doesn’t make any difference what the Federal Reserve is doing, it doesn’t make any difference what’s going on in Europe. We buy it. Everybody thinks we sit around and talk about macro factors. Charlie and I don’t have any discussions about macro factors.” I believe Buffett’s overall confidence and commitment to his personalized investing strategy, which involves neglecting the advice given by major news headlines and macroeconomic uncertainties, has allowed him to become one of the world’s greatest investors. Hearing Buffett’s perspective made me realize that in order to be a successful investor, you must ignore the everyday market volatility and dire predictions of the newscasters (e.g., The Wall Street Journal, Yahoo Finance, and Jim Cramer). If you think about it, the global economy is always riddled with uncertainty. There are many uncontrollable, external factors (e.g., natural disasters, pandemics, wars) that have a considerable impact on the day-to-day trading price of a business, which makes it exceedingly difficult for investors to conduct accurate, short-term forecasts. Doing so would require the consideration of millions of different data points, some of which would be impossible to collate. It is for this reason that Buffett focuses on making long-term investments in whole businesses rather than attempting to make short-term monetary gains through the stock market. More specifically, Buffett states that he “buys on the assumption that they could close the market the next day and not reopen it for five years,” which reinforces the importance of finding and acquiring businesses with high intrinsic values. Consequently, as suggested by Buffett, I believe the art of investing is relatively simple and can be boiled down to concentrating on the long-term fundamentals of individual businesses, investing in businesses that you understand and are within your circle of competence, and most importantly, whose intrinsic value is greater than what’s reflected in the current share price.

In the morning session of the annual shareholders’ meeting, Buffett repeatedly emphasized the importance of ignoring the daunting headlines and external macroeconomic factors. More specifically, when asked if systemic risk fears have ever influenced his eagerness to buy equities, Buffett responded by stating, “If we find a business that we think we understand and we like the price at which it’s being offered, we buy it. It doesn’t make any difference what the headlines are, it doesn’t make any difference what the Federal Reserve is doing, it doesn’t make any difference what’s going on in Europe. We buy it. Everybody thinks we sit around and talk about macro factors. Charlie and I don’t have any discussions about macro factors.” I believe Buffett’s overall confidence and commitment to his personalized investing strategy, which involves neglecting the advice given by major news headlines and macroeconomic uncertainties, has allowed him to become one of the world’s greatest investors. Hearing Buffett’s perspective made me realize that in order to be a successful investor, you must ignore the everyday market volatility and dire predictions of the newscasters (e.g., The Wall Street Journal, Yahoo Finance, and Jim Cramer). If you think about it, the global economy is always riddled with uncertainty. There are many uncontrollable, external factors (e.g., natural disasters, pandemics, wars) that have a considerable impact on the day-to-day trading price of a business, which makes it exceedingly difficult for investors to conduct accurate, short-term forecasts. Doing so would require the consideration of millions of different data points, some of which would be impossible to collate. It is for this reason that Buffett focuses on making long-term investments in whole businesses rather than attempting to make short-term monetary gains through the stock market. More specifically, Buffett states that he “buys on the assumption that they could close the market the next day and not reopen it for five years,” which reinforces the importance of finding and acquiring businesses with high intrinsic values. Consequently, as suggested by Buffett, I believe the art of investing is relatively simple and can be boiled down to concentrating on the long-term fundamentals of individual businesses, investing in businesses that you understand and are within your circle of competence, and most importantly, whose intrinsic value is greater than what’s reflected in the current share price.

Halfway through the morning session, Buffett addresses a shareholder's concern regarding market volatility. When asked about his opinion on Berkshire Hathaway’s current market position (note: many shareholders thought it was significantly undervalued at the time), Buffett responded by stating “I will tell you, in the next 20 years, Berkshire will someday be significantly overvalued, and at some points significantly undervalued. That will be true for Coca-Cola, Wells Fargo, IBM, and all of the other securities. I just don’t know in which order and at which times. But the important thing is that you make your decisions based on what you think the business is worth, and if you make your buy and sell decisions based on what you think the business is worth, you simply have to do well in stocks. The beauty of stocks is that they sell at silly prices from time to time. At the end of the day, that’s how Charlie and I have gotten rich. The stock market is the most obliging, money-making place in the world because you don’t have to do anything. It’s a marvelous game and the rules are stacked in your favor.” Buffett’s perspective on this issue made me realize that market volatility should be seen as an opportunity rather than a threat. Opening the computer to glaring red numbers in the Dow Jones, Nasdaq, and S&P 500 often sends individuals into a panic. However, it is important to recognize that large downward price swings provide investors with favorable entry points into the market and the opportunity to purchase additional shares of valuable companies at lower prices. I believe investors should see market volatility as a way to be rewarded for making wise and well-thought-out investment decisions. Furthermore, Buffett’s outlook has allowed me to understand that volatility is just outside noise that should largely be ignored, especially for those who are looking to make long-term investments based on a company's fair intrinsic value.

Later in the morning session, Buffett addressed a concern proposed by a group of MBA students from the University of Virginia in Charlottesville about the current state of higher education, specifically as it relates to business schools across the country. Buffett’s perspective was very similar to that of the ‘Harvard Business Review: How Business Schools Lost Their Way’ article we read earlier in the semester. More specifically, Buffett suggested that he thinks business schools have taught students a lot of nonsense about investments and that if it were up to him to decide the academic curriculum, he would have students take courses on how to value a business and how to think about markets. Buffett elaborated on this position by sharing, “I think if people grasped the basic principles in these two courses, they would be far better off than if they were exposed to a lot of things like modern portfolio theory or option pricing. Who needs option pricing to be in an investment business? I mean, it’s astounding to me how the schools have focused on one fad after another in finance theory, and it’s usually been very mathematically based. It has totally drifted away – the teaching of investments.” I found this excerpt to be both accurate and relatable, especially as a current undergraduate student pursuing a degree in finance. Most of the classes I have taken thus far have focused heavily on traditional academic theories such as the capital asset pricing model (CAPM), efficient market hypothesis (EMH), and dividend discount model (DDM). However, none of these classes emphasized the importance of learning other valuation methods that are grounded in actual, everyday business practices such as determining the intrinsic value of a business or analyzing potential long-term growth trends. Moving forward, I think it is critical that business schools put less emphasis on scientific rigor and instead prioritize conceptualizing broad, but widely practiced investment strategies. In the wise words of Buffett, “It is really not that complicated. If you buy businesses for less than they are worth, you are going to make money.”

Even though Buffett tries to simplify investing in his annual meetings, some shareholders still get impatient. More specifically, in the video, a shareholder by the name of Neil Steinhoff emphasized that he did not own Buffett’s stock for the glamor, but rather to earn money. Furthermore, he highlighted that since 1999, the Berkshire Hathaway stock had not gone up appreciably, whereas gold had gone up multiple times. He believed this warranted some sort of explanation and Buffett responded by stating, “The one thing I would bet my life on, essentially, is over a 50-year period, not only will Berkshire do considerably better than gold, but common stocks as a group will do better than gold. I mean, if you own an ounce of gold now and, you know, you caress it for the next hundred years, you’ll have an ounce of gold a hundred years from now. If you own a hundred acres of farmland, you’ll also have a hundred acres of farmland a hundred years from now. It’s very hard for an unproductive investment to beat productive investments over any long period of time.” I believe the most important takeaway from this excerpt is that productive assets (e.g., companies that produce a good or service) provide investors with the opportunity to achieve a better long-term return on their investment, whereas nonproductive assets (e.g., gold, cryptocurrencies, etc.) only derive value from their scarcity and desirability. Nonproductive assets may perform well in short increments of time, but not in the long-term, when compared to the stocks of good businesses with fair intrinsic values. Buffett emphasizes that the sole purpose of investing is to build wealth over time, so putting your money into nonproductive assets that lack the ability to produce large monetary gains would be a foolish decision and I wholeheartedly agree.

Finally, Buffett shared his perspective on the importance of a company’s competitive position when an audience member asked him to discuss a big Berkshire subsidiary that had done well over the past five years. Buffett responded by suggesting that, “the railroad business for very fundamental reasons, which I should have figured out earlier, has improved its position dramatically over the last, really, 15 or 20 years, but it continues to this day. I mean, it is an extremely efficient and environmentally-friendly way of moving a whole lot of things that have to be moved and it’s an asset that couldn’t be duplicated for, you name it, three, four, five, six times, you know, what it’s selling for. So it’s a whole lot better business than it was five or 10 years ago.” I believe that Buffett raises an important point as it relates to finding and investing in businesses that are hard to duplicate and have high barriers to entry. If there are only a few companies in a particular sector, then most market consumers are going to be dependent on their products and/or services, which in turn makes them valuable. With fewer competitors, companies with strong positions often have more pricing power which can enhance profitability. A prime example of this can be seen in the aerospace sector, where Boeing and Airbus are the only two main players. Similar to Buffett’s strategy, I think both of these companies would be solid, long-term investments due to their strong competitive market position.

Throughout this semester, we have spent a lot of time talking about what type of personality and emotional framework is needed to become a successful investor. I believe Buffett’s biggest strength is his simple, long-term approach to the art of investing. While not every one of his companies and stock picks have been a home run investment, Buffett has built an extremely successful, multinational conglomerate in Berkshire Hathaway. His disciplined methodology of purchasing undervalued, productive assets with strong competitive positions has driven his success and made him an icon in the world of investing.