Since becoming CEO in 1965, he's led Berkshire's Class A shares (BRK.A) to an average annual return of 20.1% and created almost $690 billion in value for shareholders (himself included). On an aggregate basis, Buffett has overseen a greater than 3,600,000% increase in his company's share price in 57 years. Berkshire Hathaway's share price could plummet 99% tomorrow, and it would still be handily outperforming the S&P 500, including dividend payouts, since the beginning of 1965.
But perhaps the greatest aspect of Buffett's success isn't his vast outperformance, so much as the transparency and simplicity of the strategy that's allowed him (and his shareholders) to flourish. What follows are the 10 reasons Warren Buffett has been such a successful investor for nearly six decades as Berkshire's CEO.
1. The Oracle of Omaha lets his winners run over the long term
Despite generating a 20.1% average annual return over 57 years, Buffett isn't infallible. Berkshire Hathaway has had down years, and will almost certainly have negative-return years in the future.
But one of his many keys to outperformance has been allowing his winners to run over long periods. Winning stocks like beverage giant Coca-Cola, credit servicer American Express, credit ratings agency Moody's, and insurer Globe Life, have been continuous holdings since 1988, 1993, 2000, and 2001, respectively.
2. He tends to gravitate to cyclical companies and industries
To build on the previous point, the Oracle of Omaha absolutely loves to buy cyclical stocks. By "cyclical," I mean companies that perform well when the economy is expanding and struggle when it's contracting.
Even though recessions are inevitable, periods of expansion last considerably longer. Rather than trying to guess when a recession might occur, Buffett has set Berkshire Hathaway's portfolio up to benefit from these disproportionately long periods of expansion and the natural growth of the U.S. and global economy over time.
3. Brand-name, time-tested businesses are popular buys
Another reason for Buffett's incredible success is his willingness to invest in brand-name, time-tested businesses. While management teams come and go, Buffett is well aware of the power behind branding and a loyal customer base.
For instance, Apple (AAPL -2.34%) is one of the most recognized brands in the world, and it has an exceptionally loyal customer base. Apple has relied on product innovation to control the lion's share of the U.S. smartphone market, and is in the process of reinventing itself to emphasize subscription services moving forward. After generating $116.4 billion in operating cash flow over the past 12 months, the data suggests Apple's strategy is working.
4. Meanwhile, potential fads and momentum plays are often avoided
Equally important is Buffett's avoidance of trends and investments that can be viewed as fads. Although next-big-thing investments, such as genomics, 3-D printing, cannabis, and blockchain technology, have offered incredible growth potential, these trends have also endured large bubble-bursting events.
Buffett has been particularly critical of crypto blue chip Bitcoin (BTC -0.13%), stating that, "If you... owned all of the Bitcoin in the world and you offered it to me for $25, I wouldn't take it." The Oracle of Omaha prefers businesses with longevity that produce something. In Buffett's view, Bitcoin is a major red flag because it doesn't produce anything.
5. Buffett focuses on sectors and industries he knows well
A fifth reason for Warren Buffett's success is his narrow research focus. Instead of trying to understand a little bit about every sector of the market, the Oracle of Omaha aims to be highly knowledgeable in a few sectors and industries.
In particular, Buffett has a keen eye for spotting value and well-rounded businesses in the financial, energy, and consumer staples sectors. Peruse Berkshire Hathaway's portfolio and its owned/acquired assets, and you'll find plenty of banks, insurance companies, energy providers, and food/beverage companies. Financial stocks have been Buffett's go-to for decades.
6. He leans on his investing team for sectors/industries outside his comfort zone
Warren Buffett realizes he can't cover the entire stock market, which is why he relies on his investment team to help him out in the sectors and industries he doesn't have a firm grasp on. This team includes right-hand man Charlie Munger, as well as "investing lieutenants" Todd Combs and Ted Weschler.
Combs and Weschler have often been leaned on for their expertise in tech and healthcare. However, a recent example of their investing prowess can be seen in Berkshire's Kroger position. Buffett's company is sitting on hearty gains thanks to one or both investing lieutenants recognizing that COVID-19 and inflation would ultimately turn out to be a positive for the nation's largest grocery chain.
7. Berkshire's portfolio is relatively concentrated
In spite of holding stakes in more than four dozen securities, Berkshire Hathaway's portfolio is concentrated in just a small handful of stocks. Apple, Bank of America (BAC -1.56%), Chevron (CVX -0.54%), Coca-Cola, and American Express, combine to account for 72.2% of the nearly $343 billion investment portfolio. Further, Berkshire's top-10 holdings make up 85.3% of invested assets.
Warren Buffett has long believed that diversification is only necessary is you don't know what you're doing. With a narrow research focus and plenty of help from his investing lieutenants in other areas of the market outside of his comfort zone, it's plainly evident that Buffett and his team feel confident in their research.
8. Buffett buys when others are fearful
Yet another reason for Buffett's long-term outperformance is his inability to be scared away from market corrections, bear markets, and complete meltdowns. Whereas it's common for investors' emotions to bait them into poor decision-making during market downturns, Buffett chooses to be greedy when others are fearful.
As an example, the Oracle of Omaha invested $5 billion into preferred stock of Bank of America in 2011. BofA was struggling mightily at the time under the weight of legal settlements following the housing crash. Since then, Buffett has pivoted this initial investment, as well as subsequent buys, into a nearly $38 billion stake in Bank of America. Today, BofA is highly profitable and returning boatloads of capital to its shareholders.
9. Buffett's company is a passive income powerhouse
Speaking of returning capital to shareholders, Buffett's success is also due to his company collecting massive amounts of passive income each year. Taking into account an active first quarter that saw Buffett and his team make a number of investments, Berkshire Hathaway appears to be on track to collect more than $6 billion in dividend income over the next 12 months.
Integrated oil and gas stock Chevron is currently Berkshire's golden goose for dividends, with $904.1 million expected to be collected over the next year. Chevron is benefiting from multidecade highs in crude oil and natural gas, and can rely on its midstream (e.g., transmission pipelines and storage) and downstream assets (refineries and chemical plants) if crude and natural gas prices back significantly off their highs.
10. He's a big believer in share buybacks
Lastly, Buffett and Munger have invested heavily in what's clearly their favorite stock on the planet: their own company. Since Berkshire's board of directors introduced new share repurchase parameters in July 2018, the Oracle of Omaha has green-lit $61.1 billion worth of buybacks.
Buying back stock tends to have a positive impact on the share price of companies that are profitable on a recurring basis. By reducing the number of shares outstanding, earnings per share tends to climb over time. This can make a stock appear more fundamentally attractive, thereby lifting its share price.
This transparent strategy is the secret sauce that's allowed Warren Buffett to run circles around the S&P 500 for decades.