Reading through the historical transcripts of Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial) annual shareholder meetings, where both Warren Buffett (Trades, Portfolio) and Charlie Munger (Trades, Portfolio) have spoken to their shareholders on many different topics over the past few decades, it is clear that the way Buffett invests has changed substantially since he first started managing money for outside clients in the 1950s.
When he formed the Buffett Partnerships, Buffett followed a strategy that was very similar to that initially described by Benjamin Graham. He wanted to buy "cigar butts," stocks that were trading at a deep discount to their net asset value, where the risk of permanent capital impairment was low, but the potential for substantial gain was high.
However, when Buffett dissolved his first investment partnerships in the late 1960s, he told investors one of the reasons he had decided to take this action was because the number of opportunities available in the market had declined dramatically.
This possibly marks the first substantial change in his investment process. While Buffett did continue to invest with a value slant, instead of looking for cigar butts, he started looking for high-quality businesses generating substantial cash flows that he could buy and hold. But this was just part of the strategy.
The Oracle of Omaha was also looking for attractive operating business to add to his Berkshire Hathaway empire. These included both insurance stocks with float he could invest and high-quality consumer stocks such as See's Candies. Buffett stopped focusing on assets and started focusing on cash flow.
Also, at this stage Buffett began to place more emphasis on management and businesses' reputations -- he has only placed more emphasis on this part of the equation in recent years. For example, in the financial crisis, Berkshire Hathaway became a lender of last resort to many companies, including General Electric and Goldman Sachs, primarily due to Buffett's assessment of each company's management.
Buffett's strategy is difficult to define
What I'm trying to say here is that, based on my analysis of the Oracle of Omaha's investments over the years, it is tough to put his style of investing into just one bucket.
It is also important to note that Buffett and Berkshire Hathaway have two advantages many other investors do not. The conglomerate's size and scale make it the first port of call for high-quality businesses looking for additional capital, and gives it the kind of clout that means it can achieve fantastic deals without having to take on too much risk.
This further clouds how we look at Buffett's investment strategy. In the past decade, particularly during the financial crisis, Buffett made substantial use of his favorable position by seeking out highly attractive deals where Berkshire would win in most outcomes. Even when he stepped in to help struggling Canadian mortgage lender Home Capital, Berkshire was able to achieve such an attractive deal that the conglomerate would have profited in virtually all situations apart from bankruptcy, but the very fact that Buffett was interested in helping the company was enough to restore creditor confidence in the lender.
To put it another way, you could argue that Buffett's strategy is being Buffett. Home Capital is just one of many scenarios over the past few decades where Berkshire has been able to achieve a favorable outcome for itself just by investing, as the very fact Warren Buffett (Trades, Portfolio) is involved in a company is enough to restore creditor confidence.
Overall, then, it is complicated to try to pigeonhole and replicate Buffett's investment style. Not only do we only have limited information when he invests, but it is often the case that just by being in a position, Buffett is able to make a profit.
Disclosure: The author owns shares in Berkshire Hathaway.
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