From the time Warren Buffett took over Berkshire Hathaway in 1965 through 2023, the company's market value has increased at a compound annual rate of 19.8%. That's an astounding figure that would've turned a $1,000 initial cash outlay into nearly $44 million today.
There's no denying that to build an outstanding track record like that over many decades (which has transformed Berkshire into a gargantuan $900 billion conglomerate), Buffett has proven he's one of the most skilled business analysts ever. However, I think there's another critical factor that has propelled his returns, and using it can supercharge your portfolio, as well.
Change your perspective
A smart way to invest is with a long-term mindset. Most readers have decades before they approach retirement. But even if you're 10 years away, that's still a long enough time horizon to make focusing intensely on headlines and the minute details of analyst estimates a distraction.
Thinking long term is becoming more of a rarity these days. The introduction of Robinhood more than a decade ago started a race to zero when it came to trading fees, which made it free and effortless to trade.
Add this to the constant flow of news, and it makes sense why the average holding period of a stock these days can be measured in months. That's in stark contrast to the average holding period of over eight years in the 1950s. The average investor is not only encouraged by the news cycle and advertising to constantly be tinkering with their portfolios, but they have the tool (the smartphone in their pocket) to do so quickly.
This is where Buffett's approach stands out from the crowd. While it might be exciting and fun to try and predict short-term price movements, it's usually a losing proposition. Almost anything can happen in the short term. Consequently, investors who have multiyear outlooks have a sizable and growing advantage because stocks tend to rise over long periods. It's that simple.
Being a successful investor requires having the right skill set and temperament, like how to properly analyze financial statements, having the conviction to place a bet when the risk-reward is attractive, and reducing emotional influences. But it also means picking the spots where there's less attention being placed, and that's with a time horizon of multiple years out.
Image source: Getty Images.
Focus on the most important factors
Now that we've established that focusing on the long term is wise, the next question centers on how to identify what makes a winning stock. When you think about the next five years, as opposed to the next five months, it forces you to focus on the most important factors that drive business results.
I'm talking about things like the presence of an economic moat, solid growth potential, improving margins, and a reasonable valuation. These are favorable ingredients that should result in an investment working out well.
Netflix is the perfect example of a stock that was left for dead due to the dominance of a short-term perspective that took over investor sentiment at the time. The company lost a total of 1.2 million members in the first six months of 2022, following a surge in demand during the depths of the pandemic. Investors worried that intensifying competition spelled the beginning of the end of Netflix's run atop the streaming landscape.
Investors bid the shares down to a price-to-earnings (P/E) ratio of 15 in the summer of 2022. In the last 18 months, the stock is up 157% (as of March 21), as the market has become enthusiastic once again following a string of strong financial results that saw Netflix add new members at a rapid clip.
To be fair, hindsight is always 20/20. But the Netflix example shows you that even some of the most dominant industry-leading enterprises can see their stocks get hammered after a couple of quarterly financial results come in below expectations.
This is a great example of how a long-term mindset can pay off and benefit your portfolio.
