A review of Buffett's growth trajectory reveals a clear and progressive evolution in his investment philosophy. The master continues to evolve.
The division of Buffett's investment philosophy into developmental stages typically categorizes the partnership phase as the early stage, the period after gaining control of Berkshire Hathaway until the late 1980s as the middle stage, and the period from the 1990s to the present as the later stage. This division is based on the organizational form and business model of the company and has some merit. However, strictly speaking, it is not sufficiently accurate when considering the evolution of his personal investment philosophy. My own opinion is to divide it as follows:
First stage (early) 1949-1971 (ages 19-41).
This era mainly covers the 1950s and 1960s. The investment style was Graham-style margin of safety, later referred to by others as "value investing," which Buffett humorously called the "cigar butt" approach, focusing only on buying cheap stocks.
In 1949, at the age of 19, Buffett read Benjamin Graham's classic work *The Intelligent Investor* for the first time and was immediately captivated by it. Buffett’s roommate Wood remarked, “It was like Buffett had discovered God.” It is entirely reasonable to consider this year as the starting point of the early formation of Buffett’s investment philosophy.
On July 17, 1970, Buffett wrote in a letter to Graham, “Up until this point, my investment decisions had been driven by glands rather than brains.” Buffett himself likened this experience to “Paul on the road to Damascus,” and he learned the philosophy of “buying one dollar for forty cents.” From then on, the concept of a “margin of safety” became the cornerstone of Buffett’s investment philosophy.
Several key events that followed played an important role in Buffett’s evolution: In 1950 (age 20), Buffett formally “apprenticed under Graham” at Columbia University Graduate School; in 1954 (age 24), Buffett joined Graham-Newman Corporation and worked for Graham; in 1956 (age 26), he founded his first partnership and began his entrepreneurial journey; in 1959, he met and befriended Charlie Munger, with whom he carried out a series of collaborations throughout the 1960s; in 1962, Buffett began purchasing shares of Berkshire Hathaway, becoming the largest shareholder in 1963, and officially took over Berkshire Hathaway in 1965 (age 35); in 1967 (age 37), Buffett purchased National Indemnity Company for Berkshire Hathaway at a price of $8.6 million, marking his entry into the insurance industry; in 1969 (age 39), Buffett dissolved his partnership to focus on managing Berkshire Hathaway.
During the operation of the partnership, Buffett’s investment methods were initially divided into three categories, later evolving into four. In January 1962, Buffett categorized his investment methods into three types in a report to his partners:
The first type: Generals (undervalued investments). These refer to stocks whose value is underestimated. This category accounts for the largest proportion of investments.
The second type: Workouts (arbitrage investments). The pricing of these investments is more dependent on corporate management decisions rather than supply and demand between buyers and sellers. Corporate actions affecting investment prices include mergers, liquidations, reorganizations, spin-offs, etc. These investments are unrelated to the performance of the Dow Jones Index.
The third type: Control (control-based investments). This involves either taking control of the company or acquiring a significant number of shares to influence management decisions. These investments also have no relationship with the performance of the Dow Jones Index.
The first and third categories can be mutually convertible. If the price of purchased 'Generals' remains low for an extended period, Buffett would consider buying more shares, thus transforming it into 'Control'; conversely, if the price of 'Control' rises rapidly within a few years of purchase, Buffett typically considers cashing out at the peak, thereby completing a successful 'Generals'-type investment.
In his January 1965 report to partners, Buffett split the original first category of investment, Generals, into two: Generals-Private Owner Basis and Generals-Relatively Undervalued.
Generals-Private Owner Basis refers to a type of undervalued stock, usually smaller in scale, lacking appeal, and overlooked by the market. Moreover, its price is significantly lower than the value (intrinsic value) of the company to a private equity investor. If the price remains undervalued for a long time, it can transform into Control.
Generals-Relatively Undervalued refers to stocks that are priced lower compared to companies of similar quality. Although undervalued, they are generally larger in scale and less meaningful to private investors, thus unable to convert into Control.
As early as 1964, Buffett noticed that Graham’s strategy of purchasing cheap stocks had issues with value realization, was not perfect, and such investment opportunities were diminishing as the stock market rose. The fourth category of investment added by Buffett in his January 1965 report, Generals-Relatively Undervalued, can be seen as a new exploration. However, it remained in the quantitative change stage and did not completely break away from Graham's investment framework. The best case of this type of investment was in 1964 when Buffett invested 40% of the partnership’s funds into American Express during the 'salad oil scandal' and held the shares for four years. In the following five years, American Express's stock price increased fivefold.
As Mangge said, Buffett’s experience working under Graham and the enormous profits he generated once obstructed his thinking, making it difficult to escape such a successful mindset.
In 1969 (at age 39), Buffett was greatly inspired after reading Fisher's book Common Stocks and Uncommon Profits. However, what truly freed Buffett from Graham's intellectual constraints and completed his evolution was Charlie Mangge. Mangge had a keen insight into the value of superior companies, further concretizing Fisher's corporate characteristics theory. 'Charlie pushed me in another direction, rather than only suggesting the purchase of cheap stocks like Graham did; this was the power of his thinking, which broadened my horizons. I evolved from an ape to a human at an extraordinary speed, otherwise, I would be much poorer today.'
In summary, encountering issues with value realization made Buffett recognize the limitations of Graham’s philosophy of 'buying any company regardless of its essence,' leading him to integrate Fisher and Mangge’s outstanding enterprise expansion value theory into his philosophy.
Stage Two (Middle Period) 1972–1989 (Ages 42–59).
On January 3, 1972, acting on Mangge's advice, Buffett acquired See’s Candies for $25 million. This marked the beginning of Mangge continually pushing Buffett towards paying a premium for quality.
As See's Candy grew robustly, both Buffett and Munger realized that 'it is much easier and faster to buy a good business and let it run freely than to purchase a struggling company and then spend significant time, effort, and money propping it up.' The formation of this investment philosophy marked Buffett’s evolution 'from ape to human.'
Buffett combined the ideas of Graham, Fisher, and Munger to gradually form his own style. This evolutionary phase can be corroborated by the original words of Buffett and Munger. In 1997, Munger stated at the company’s annual shareholder meeting: 'The acquisition of See's Candy was our first purchase based on product quality.' Buffett added: 'If we hadn’t acquired See's Candy, we wouldn’t have bought Coca-Cola shares.'
A notable characteristic of Buffett’s investment approach during this phase was a reduction in arbitrage operations and investments in cheap stocks, coupled with an increase in control over excellent businesses and the use of insurance float for long-term investments in high-quality common stocks.
Excellent enterprisesMergers and acquisitionsPermanent ownership: such as See's Candy and Nebraska Furniture Mart.
Permanent holding of common stocks in a few 'inevitably great' enterprises: such as The Washington Post, GEICO, and Coca-Cola.
Long-term investment in common stocks of some 'highly probable' excellent enterprises.
Intermediate-term fixed-income securities.
Long-term fixed-income securities.
Cash equivalents.
Short-term arbitrage;
Convertible preferred shares;
Junk bonds.
In the first phase, Buffett's investment philosophy and role were essentially those of a 'private equity fund manager' in the Graham style; in the second phase, he transformed into a dual role that combined both entrepreneur and investor. He said, 'Because I see myself as a business operator, I have become a better investor; because I see myself as an investor, I have become a better business operator.'
This phase can be summarized by a statement Buffett made in 1985: 'I am now more willing than I was 20 years ago to pay a bit more for good industries and good management. Ben tended to look at statistical data in isolation. But increasingly, I value intangible qualities.'
Third phase (later period) from 1990 to present (since age 60).
Namely, since the 1990s. There is also a more precise way to divide this – from 1995 (age 65) to the present as Buffett’s later period. This is corroborated by Munger’s words: 'After turning 65, Warren’s investment skills truly advanced further beyond his already high level.'
After entering the 1990s, Berkshire Hathaway faced greater challenges for its future, as described by Munger:
1. Our size has become so large that it limits our investment choices to areas that have been tested by very smart people and are much more competitive.
2. The current environment suggests that common stocks over the next 15-20 years will differ greatly from what we’ve seen in the past 15-20 years.
In simple terms, Buffett faces a dilemma: too much money but too few opportunities. Confronted with this challenge, as Buffett continues to learn and leverage the power of compounding, his investment philosophy evolves to a higher level, becoming more comprehensive and highly refined. The evolution of Buffett's investment thinking during this phase is reflected in the following aspects:
1. Introduction of the 'moat' concept
This marks the maturation of Buffett’s art in evaluating long-term competitive advantages and intrinsic value of companies. In 1993, Buffett first introduced the concept of a 'moat' in his letter to shareholders. He said, 'In recent years, Coca-Cola and Gillette razors have actually increased their global market shares. The power of their brands, their product characteristics, and sales strength give them a tremendous competitive advantage, forming a moat around their economic fortresses. By contrast, ordinary companies without such protection fight on. As Peter Lynch said, the stocks of companies selling similar products should carry a warning label: 'Competition is hazardous to your health.''
On May 1, 1995, at Berkshire Hathaway’s annual meeting, Buffett elaborated on the concept of a 'moat': 'A wonderful castle surrounded by a deep, dangerous moat. The owner of the castle is an honest and elegant person. The main source of strength of the castle lies in the master’s brilliant mind; the moat permanently serves as an obstacle to those attempting to attack the fortress; the master inside the castle produces gold but does not keep it all for himself. Roughly translated, it means we like dominant large companies whose franchises are difficult to replicate and that have enormous or even permanent sustainability.'
At the 2000 annual shareholders’ meeting, Buffett further explained, 'We use the 'moat,' its ability to widen, and its invulnerability as key criteria for judging a great company. And we tell management teams that we expect the company’s moat to widen every year. This does not necessarily mean profits must increase year after year, as that is sometimes impossible. However, if a company’s moat keeps widening each year, it will operate successfully.'
2. Shift in investment strategy
One change: 'Due to Berkshire’s rapidly growing assets and the dramatic shrinking of investment space that could significantly impact our performance, we need to make smart decisions. Therefore, we adopted a strategy that requires only a few smart moves — rather than being overly clever — because, in fact, one good idea per year is enough for us.' This indicates that Buffett has adopted a more concentrated stockholding investment strategy.
Another change: With larger capital size, Buffett’s common stock investments became increasingly focused on finding undervalued excellent or good large companies within niche markets, implementing selective contrarian investment strategies. That is, he pays active attention when a large company with enduring competitive advantages encounters setbacks and its stock price is temporarily suppressed by short-sighted market behavior. This suggests that the Graham-style approach of buying cheap stocks indiscriminately no longer suits a giant like Berkshire.
3. Development of the 'swing' concept
American baseball superstar Williams explained his batting technique in his book *The Science of Hitting*. He divided the strike zone into 77 units, with each unit representing a baseball. He would only swing when the ball was in the optimal unit (the sweet spot), even if doing so risked striking out, because hitting balls in the worst positions would severely reduce his success rate.
Buffett likened this strategy to investment and developed the concept of 'swinging the bat' in the field of investment. In a 1995 speech to students at the USC Marshall School of Business, he summarized the concept: 'In investing, there is no such thing as a pitch you have to swing at. You can stand at the plate, and the pitcher may throw a good pitch; General Motors might offer $47, but if you lack sufficient information to decide whether to buy at $47, you can let it pass by without anyone calling a strike. Because only when you swing and miss might you be called out.'
4. Distinction Among Three Types of Businesses
In his 2007 letter to shareholders, Buffett made an insightful division of businesses into three categories: great (outstanding), good, and detestable.
Great businesses: These possess enduring 'moats,' deliver high returns on investment, and do not require substantial capital increases to achieve profit growth, such as See's Candies. Good businesses: These enjoy lasting competitive advantages and relatively high returns, but require significant capital increases to achieve growth, such as FlightSafety International. Detestable businesses: These are characterized by rapid growth that demands large amounts of capital, yet yield limited or no profits, such as the airline industry.
Buffett vividly compared these three types of businesses to three kinds of 'savings accounts'—the great account pays very high interest, which rises over time; the good account pays attractive interest, but only if you add more deposits; and the detestable account offers insufficient interest and requires you to keep adding funds for disappointing returns.
5. Breakthroughs in Cross-Border Investment and Acquisitions
Buffett’s first cross-border investment was in 1991 when he invested in Guinness, a UK-based alcoholic beverage company. The most representative cross-border investment occurred in 2003 when Buffett invested nearly $500 million in PetroChina. The most emblematic cross-border acquisition took place in 2006 when Buffett purchased an 80% stake in Iscar Metalworking Companies for $4 billion, marking his largest investment outside the United States and representing the largest foreign investment in Israel’s history.
A few years ago, Buffett executed a brilliant cross-border investment in the South Korean stock market. He skimmed through an investment manual provided by an investment bank and noticed some financially sound companies trading at a price-to-earnings ratio of just three times earnings. He selected about 20 stocks to purchase and sold them when they rose five to six times in value, nearing their intrinsic worth.
6. Diversification in Non-Conventional Investments
With a bulging wallet, Buffett achieved new breakthroughs in non-conventional investments. In 1991, he invested $300 million in American Express through a private placement, acquiring so-called 'Percs' shares, which entitled him to receive special dividends during the first three years of investment and could be converted into common stock before August 1994. Between 1994 and 1995, he established a position of 45.7 million barrels in oil derivatives contracts. In 1997, he purchased 111.2 million ounces of silver and $4.6 billion worth of long-term U.S. zero-coupon bonds at book value. In 2002, he entered the foreign exchange market for the first time, holding a total of $21.4 billion in foreign currency positions by the end of 2004, with a portfolio spanning twelve foreign currencies. In the same year, he ventured into the euro-denominated junk bond market, reaching a total value of $1 billion by 2006. Additionally, Buffett engaged in fixed-income arbitrage and held other derivative contracts, which fell into two main categories: Credit Default Swaps (CDS) and selling long-term put options on stock indices.
Notably, divesting from foreign exchange investments to acquire overseas companies represents Buffett's latest investment strategy of not holding excessive dollar-denominated assets or cash. As Buffett pointed out, Berkshire Hathaway’s primary base remains in the United States, but to hedge against further depreciation of the US dollar, acquiring high-quality overseas enterprises serves a dual purpose.
In summary, the later-stage Buffett has adopted a more open-minded approach with increasingly comprehensive techniques. His conventional investment selection skills have become even more refined, with a more concentrated investment focus, while also intensifying overseas investment and acquisitions. In unconventional investments, his strategies have grown more diversified and aggressive. While experts and scholars summarize the master’s classic strategies into dogma, the master continues to evolve.
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