Let's face it: When it comes to investing, Warren Buffett does everything better than everyone. Still, it's worth reflecting on the specific attributes and skills that have made him arguably the greatest investor-businessman of his day -- as some of them may be learnable.
We asked some of our analysts what these attributes were, and they came up with the following three:
Alex Dumortier: Decisiveness. Knowing when to act -- and, even more importantly, when to stand pat -- and being able to make that decision quickly and confidently. This is one of Warren Buffett's competitive advantages.
In the acquisition criteria that he includes in every Berkshire Hathaway shareholder letter, he promises those who may be interested in selling their business [my emphasis]:
We can promise complete confidentiality and a very fast answer -- customarily within five minutes -- as to whether we're interested.
To make the McLane deal, I had a single meeting of about two hours with Tom Schoewe, Wal-Mart's CFO, and we then shook hands.
(He did, however, first call Bentonville.)
Similarly, Byron Trott, who was Buffett's preferred investment banker at Goldman Sachs, said he put together a deal with Buffett in a 20-minute phone call... for Berkshire to invest $5 billion in Goldman at the height of the financial crisis!
What's the source of that decisiveness? First, an unparalleled knowledge of businesses and their valuation: Buffett has spent much of the past 60 years studying U.S. businesses. Second, a keen understanding of his own areas of expertise: if a company lies outside that area (such as technology firms), Buffett rejects it from consideration immediately, without the slightest hesitation or regret. Finally, I'm sure his confidence has grown over time alongside his track record of exceptional success.
Sean Williams: One of the biggest advantages Warren Buffett has in his arsenal is the recognition of the power of time and dollar-cost averaging.
A typical investor dreams of buying a stock and seeing it immediately take off post-purchase. Buffett, on the other hand, enjoys nothing more than watching the stock price of companies he wants to build a position in languish for years, because it gives him an opportunity to buy in at an attractive valuation through dollar-cost averaging.
One such company that Buffett has been dollar-cost averaging into is information technology product and service provider IBM (NYSE:IBM). Things have been downright ugly of late for Big Blue, which has had to boost its research and development spending to catch up to its peers in the cloud. In IBM's latest quarter, its adjusted profits fells by 13%, while revenue dipped by 1% sans currency fluctuations.(NYSE:IBM)
However, Buffett's vision always focuses on the long-term. He's often been quoted as saying his favorite holding period is "forever." IBM has successfully navigated multiple turnarounds before, and the company did deliver a better than 70% sales increase in cloud revenue during Q2. With free cash flow of $4.5 billion during the quarter and ample shareholder returns, Buffett can lean back and collect juicy dividends while waiting for a relatively cheap IBM to appreciate years down the road.
Although dollar-cost averaging isn't a surefire way to profit (see Tesco), it's given Buffett an extra tool in his arsenal to outperform the average investor.
Dan Caplinger: One of the essential philosophies that Warren Buffett both espouses and practices is the importance of having a long time horizon. As Sean notes, Buffett has said that his favorite time horizon is forever, and although the Oracle of Omaha hasn't hesitated to push the sell button when an investment doesn't go the way he planned, many of his most successful investments have come from holdings that he has owned for decades.
Buys like American Express and Coca-Cola have produced impressive gains over decades, and although it's easy to criticize both companies for their current challenges and sluggish short-term performance, both remain giants of their respective industries, and have found promising ways to reposition themselves to find new growth. By sticking with companies with track records of overcoming past obstacles and thriving, Buffett can have confidence that short-term roadblocks won't end up producing longer-term worries for investors.
As simple as that philosophy sounds, it can be hard for ordinary investors to have the discipline to ignore the potential ramifications of short-term news and instead stay focused on the long run. Buffett has turned that ability into the cornerstone of his investment philosophy, and it's served him and his investors well throughout his lifetime.