When Warren Buffett (Trades, Portfolio) decided to change his strategy away from buying deep value towards quality at a reasonable price, he took a step in the dark.
His first move into this investing style was inspired by Charlie Munger (Trades, Portfolio), who pushed him to pay what seemed like a high price at the time to buy See's Candies.
As it turns out, this was a fantastic acquisition. Since then, the company has generated billions of dollars in profit forBerkshire Hathaway (BRK.A, Financial) (BRK.B, Financial), which has been reinvested into other businesses, helping turbocharge the growth of Buffett's empire.
Following the See's deal, Buffett's strategy almost completely changed. Over the next few decades, he moved away from deep value, entirely focusing on quality instead.
Changing the strategy
Changing your investment strategy and style is always going to be a challenging process. Over the past few decades, there have been several high-profile blow-ups of fund managers who have decided to change their focus, with terrible results.
Moving out of your comfort zone into an arena you have little experience in will never be a simple process. In fact, most of the time, it is downright foolish to pursue this.
So, how did Buffett manage to switch from value to quality so seamlessly? The answer to this question, like so many questions about the Oracle of Omaha, is reading.
Keep learning
At the 2015 Berkshire Hathaway annual meeting of shareholders, one investor wanted to know the answer to the above question. Buffett started his response by saying, "we didn't have it thought out that well." In other words, there was no plan to move away from value at the time.
Instead, it seems that the CEO of Berkshire just continued to focus on what he did best, which was understanding businesses and their prospects:
"But we basically looked for companies where we thought we could understand what the future would look like 5 or 10 or 15 years hence. And that didn't mean we had to do it to four decimal places or anything of the sort, but we had to have a feel for it, and we had to know our limitations. So we stayed away from a lot of things."
In many respects, this style is similar to the previous value-focused strategy Buffett was using when managing his partnerships.
Buffett was also able to succeed because of his personality. As Charlie Munger (Trades, Portfolio) explained in 2015:
"Now, Warren says he was lucky to go to GEICO, but not every 20-year-old was going down to Washington, D.C., and knocking on the doors of empty buildings to try and find something out that he was curious about. So we made some of our luck by being curious and seeking wisdom, and we certainly recommend that to anybody else. And there's nothing that produces wisdom more thoroughly than really getting your own nose whacked hard when you make a mistake, and we had a firm amount of that, didn't we?"
So, the strategy hasn't been entirely mistake-free, but by learning from their mistakes and continually looking to improve, Buffett and Munger have moved forward.
Make mistakes and move on
There's a considerable amount that ordinary investors can learn from this strategy. No one is ever going to be a perfect investor. However, if you are willing to admit mistakes and are continually looking for ways to improve, then over the long-term, this hard work and effort should pay off.
As Buffett said in 2015, he didn't have a plan when he started buying quality businesses; all he did was find companies that he could understand.
That might seem like a strange comment coming from one of the world's best investors, although the reality is that the world is always changing and no plan will ever give you a definitive road map to the finish.
The best way to improve is to stick with what you know and seek out new knowledge every day. Unfortunately, there's no shortcut.
Disclosure: The author owns shares in Berkshire Hathaway.
Read more here:
- Ben Graham: Don't Chase Fashion Stocks
- What Is Important and What is Knowable
- How to Learn Investing, Accoridng to Warren Buffett and Benjamin Graham
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