Live From Omaha: Buffett’s Big 3 Investment Insights

This week is all about the Oracle of Omaha.

Over the weekend, Berkshire Hathaway held their annual shareholder meeting and The Daily Edge was in attendance to get the details.

Although the main attraction was a six hour Q&A session with Warren Buffett and Charlie Munger, what really caught my eye were the subtle insights into Berkshire’s stock picking strategies that were shared throughout the weekend.

Keep in mind, Warren and Charlie have been notoriously reserved with the intricacies of their strategy in the past, which is why today I’d like to lay out three insights that we know they employ, and explain why they’re great for retail investors like you…

Berkshire Strategy #1: Diversify

This was my first time in attendance at Berkshire Hathaway’s annual shareholder meeting. And to be honest, I never quite understood the true brilliance of Warren Buffett until I walked through the convention center doors on Friday afternoon.

This was where vendors from Berkshire’s largest subsidiaries set up exhibits for shareholders to learn about the many companies and even purchase products at discounted prices.

The diversity was blinding.

The first exhibit on the main floor was Forest River RV. Two brand-new RVs were parked and available to tour.

Next was Clayton Homes, where Buffett’s staple paper toss competition takes place. And then Geico and World Book, followed by Brooks Footwear, Fruit of the Loom, NetJets, See’s Candy and dozens more.

Berkshire’s portfolio is incredibly diverse which allows them to spread risk still without sacrificing returns. And you should too!

We here at The Daily Edge recommend that you don’t let any single investment account for more than 5% of your total portfolio value.

Berkshire Strategy #2: Invest In What You Know

Did you notice how basic the companies I mentioned above were?

A candy company, a shoe manufacturer, an underwear maker, an insurance giant and a publisher. Buffett never invests outside his “circle of competence.”

This is arguably Buffett’s most important strategy that not enough investors follow.

To best sum this up, let me take a page from Peter Lynch’s book One Up On Wall Street.

In reference to his market research for Dunkin Donuts, Peter states, “Among amateur investors, for some reason it’s not considered sophisticated practice to equate driving around town eating donuts with the initial phase of an investigation into equities. People seem more comfortable investing in something about which they are entirely ignorant… Shun the enterprise that can be observed, and seek out the one that manufactures an incomprehensible product.”

In short, stop investing in semiconductors if you don’t know an APU from a CPU, and stop buying small-cap biotechs off a “hot tip” if you don’t know the difference between Phase 2 and Phase 3 clinical trials.

Believe it or not, these basic companies that Berkshire invests in are just as profitable as the high-flying biotech and tech sectors — hence Mr. Buffett’s current net worth of $85 billion…

Berkshire Strategy #3: Moats Are Not Lame

Moats were a popular topic in Omaha this weekend after Tesla’s Elon Musk controversially stated that “Moats are lame” on a recent Tesla conference call.

As expected, when asked about the topic, Buffett took the opposite side of the argument. After all, one of Buffett’s stickiest investment nuggets has been his advice to invest in businesses “that have wide, sustainable moats around them.”

But what does he mean by this?

He’s referring to the buffer that companies employ to help them maintain a competitive edge.

They come in many forms. On Saturday, Mr. Buffett gave two examples of strong moats currently in Berkshire’s portfolio that are not easily susceptible to technological innovation.

The first was insurance giant Geico who benefits from economies of scale, brand recognition and most importantly low prices.

He then followed up this example with See’s Candy.

“I don’t think he’d want to take us on in candy,” is the line Buffett used on Saturday. That’s because See’s has a large, loyal customer base, especially on the West Coast, that can’t be easily stolen by rival candy makers.

So next time you’re looking to put money to work, think about the three strategies that helped Buffett make billions before you pull the trigger — spread it out, keep it simple and buy the buffers.

Here’s to keeping your edge,

Davis Ruzicka

Davis Ruzicka
Managing Editor, The Daily Edge
[email protected]

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