Warren Buffett: From Critics to Admiration - Four Key Investing Lessons

Many people have heard of Warren Buffett, the CEO of Berkshire Hathaway (BRK.A) (BRK.B), largely because of his impressive long-term investment record. His 2024 letter to shareholders reveals that Berkshire Hathaway has achieved an average annual return of 19.9% from 1965 to 2024, which equates to a staggering total gain of 5,502,284%. This means that an initial investment of $1,000 would have grown to nearly $45 million. In comparison, the S&P 500 index has averaged only 10.4% per year during the same time frame.

Despite the overwhelming praise he receives, Buffett's investment strategies are often questioned, especially during bullish markets when growth stocks seem to soar above Berkshire's performance.

Criticism of Buffett's Strategy

Even respected publications like The Economist have voiced doubts regarding Buffett's methods. A September article pointed out that between 2009 and 2023, Berkshire's annual return averaged 13%, slightly below the S&P 500's 15%. While Buffett acknowledged that his company's large market capitalization, which recently hit $1 trillion, means slower growth ahead, he did best the S&P 500 in 2024 with a return of 25.5%, compared to the S&P 500's 25%.

In August, Andrew Bary from Barron's questioned Buffett's outlook on the economy, as he appeared to be selling stocks and building cash reserves. Critics suggested that this indicated a bearish attitude regarding market conditions, especially as the S&P 500 experienced gains in the short term. Yet, as the market declined by over 7% in recent months, Buffett's cautious strategy is now viewed as wise. He is poised with hundreds of billions in cash, ready to acquire undervalued stocks or entire companies.

Another point of concern among some investors is the future leadership of Berkshire Hathaway, given Buffett's age of 94. Fortunately, he has prepared for this transition by appointing Greg Abel as his successor and ensuring that capable managers oversee the company’s investments.

Lessons from Warren Buffett's Investing Approach

There is a wealth of knowledge to gain from Buffett's investing philosophy, much of which he openly shares. Here are four key takeaways:

Be Contrarian

Buffett famously advises investors to "be fearful when others are greedy and be greedy only when others are fearful." This philosophy emphasizes the importance of independent thinking and not merely following trends. When stocks appear overvalued, it's sometimes wise to sell.

Stick to What You Know

Buffett emphasizes staying within one's "circle of competence." This means investing only in areas where one has a solid understanding. Although Berkshire's portfolio includes some technology stocks, many of these purchases are made by Buffett's investment managers who specialize in those sectors.

Don’t Be Afraid to Do Nothing

Investors often feel pressured to make constant trades, but Buffett has taught that sometimes the best action is to do nothing. He believes in investing in great companies and allowing them to perform over the long term. He has mentioned that his favorite holding period is "forever."

Expect Mistakes, But Learn from Them

Buffett is candid about his investment mistakes, demonstrating that errors are part of the learning process. He encourages investors to reflect on their mistakes to avoid repeating them, emphasizing that continuous learning enhances investment success.

By understanding and applying these principles, potential investors can improve their decision-making and strategy. The insights from Warren Buffett serve as valuable guidelines for anyone looking to navigate the complexities of investing.

Buffett, Investing, Stocks, Strategy