One of the finest investors of all-time Warren Buffet started his investment journey under the shadow of Benjamin Graham. Benjamin Graham’s “low-priced-common stock” strategy involves selectively buying common stocks whose past performance was great during favorable market conditions and the share price has been corrected significantly from the previous high in a severe bear market. Holding them for a medium time-period would provide a spectacular return. Buffet achieved extraordinary results, significantly beating the S&P index every single year over his initial thirteen years.
But around the 1960s, Buffet made two large investments – American Express and Disney which do not follow Graham’s investment philosophy. This was a strategic shift towards higher-quality companies with strong competitive barriers.
What kind of companies Buffet actually likes:
One simple answer would be higher quality businesses. But which are higher quality businesses? These are the kind of companies that maintain a moat (competitive advantage) that is the ability to raise prices and mostly business with “franchises”. This led him to invest in consumer products and media properties. Along with this, he made an important shift to longer holding periods which allows for long-term pretax compounding of investment values.
Based on this investment style in 1972, Buffet acquired a stake in See’s Candies. At that time, the company was trading over three times its book value and expensive by Graham’s standards. But the stock gave a stellar 32 percent compound return on Berkshire’s investment over its first twenty-seven years.
The Contrarian Approach:
The majority of Buffet’s large investments were made at the time of a crisis in an industry or company. Buffet made an investment in GEICO at the time of potential insolvency, Wells Fargo in 1989 recession, Freddie Mac in 1989 recession, and the S&L crisis.