Lots of investors want to be like Warren Buffett. His holding company, Berkshire Hathaway (BRK.A 0.26%) (BRK.B 0.33%), has outperformed the market over many years, with a compounded annual gain of 19.8% from 1965 to 2022 vs. the S&P 500's 9.9%. That's a staggering difference.
But believe it or not, Buffett doesn't call himself a stock picker. His approach to investing revolves around something else, and he claims that this strategy is what has led to his market-beating performance.
What does Warren Buffett do?
Let's back up a minute and discuss what Warren Buffett does. He's a money manager for a holding company. Through Berkshire Hathaway, he invests other people's money.
Berkshire Hathaway operates in two parts: businesses it acquires and equity positions in other businesses.
Berkshire Hathaway's total stock market positions are worth some $339 billion.
That's a big number, but Berkshire's non-market investments are pretty huge, too. In his letter to shareholders released in February 2022, Buffett said that although people often think of Berkshire as owning financial assets, it actually owns and operates more U.S.-based infrastructure assets than any other U.S. corporation. These assets totaled $160 billion in 2022.
Berkshire Hathaway owns or has a large stake in more than 60 companies. Its subsidiaries run from Acme Brick Company to XTRA Corporation. From the list you might recognize BNSF railroad, Benjamin Moore paint, and GEICO insurance. Buffett loves the insurance industry because the demand is consistent, and it provides his company with money to invest. Berkshire says it is the "world leader" in float, or funds provided by insurance policies that it can use for investment purposes. Total float was $164 billion in 2022, and this was cost-free money for the company to invest.
Along the same lines as the infrastructure assets, Buffett loves this kind of business because it has tangible, enduring value.
How Buffett thinks about investing
Investor hang on Buffett's words and if they were paying attention to his most recent annual letter to shareholders, they heard him say -- again -- that he's not a stock-picker. In the Feb. 23 letter, Buffett wrote that whether through buying full businesses or buying pieces of businesses in the stock market:
Our goal ... is to make meaningful investments in businesses with both long-lasting favorable economic characteristics and trustworthy managers. Please note particularly that we own publicly-traded stocks based on our expectations about their long-term business performance, not because we view them as vehicles for adroit purchases and sales. That point is crucial: [Berkshire Hathaway Executive Vice Chairman] Charlie [Munger] and I are not stock-pickers; we are business-pickers.
Buffett's focus is on the businesses he invests in rather than what their stocks are doing right now.
In terms of assessing what's a great a business, Buffett delivers a simple formula of durable economic advantages and excellent management. He often talks about Coca-Cola, his longest holding, and American Express, another long-held position. Berkshire completed its purchase of shares of both of those companies by 1994 and 1995, respectively, and hasn't bought shares since. In all of the years that have passed, both of these companies have operated essentially the same businesses. Their unique advantages, such as incredibly strong branding, elaborate and efficient distribution networks, and a popular product, shield their companies from upstarts, and their businesses at the scale they are at are nearly impossible to replicate. That's what Buffett considers a great business.
Together, those two companies account for just over 15% of Berkshire's total portfolio. Each one's total shares cost Berkshire Hathaway $1.3 billion at the time of purchase. Their combined dividend payout to Berkshire Hathaway in 2022 was more than $1 billion.
Choose your businesses carefully
Buffett is in a class by himself, but individual investors can make successful investing decisions for themselves by viewing investing through his lens. Careful analysis of a business in its entirety, with a focus on its long-term potential, instead of following stock movements, can lead to shareholder wealth creation.
