Author: Jill Fisch

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Berkshire’s Enigmatic Secret Sauce

A former student of mine is working on a project that seeks to identify the factors that lead to sustained superior business performance.  Her task brings to mind Warren Buffett, both for his philosophy and his experiences.

Berkshire Hathaway is surely the dominant example of a company that has delivered consistent superior returns throughout its history.  Buffett states, in his letters compiled into The Essays of Warren Buffett, that his returns, first at Buffett Partnership and then Berkshire Hathaway, have averaged 20% per year, as compared to the 10% return delivered by the general market.  Buffett himself notes that this differential is likely to be considered “statistically significant.”

Understanding how to think about Buffett’s remarkable success is challenging, however.  Buffett offers a broad-based set of investment principles that are easily embraced by the average investor – do not try to time the market, invest for the long term, minimize your transaction costs, and invest in businesses that you can understand.  Over time, empirical studies confirm that these strategies are likely to generate better returns than alternatives.

Yet, they fail to explain Buffett’s remarkable investment success.  Buffett himself explains that investors cannot expect to generate, on the average, a better return that the market, and that his strategy is more suited to avoiding egregious mistakes than identifying big winners.  Buffett’s track record belies this conservatism, and his letters suggest that it is possible to outperform the market over time, by identifying outstanding businesses and investing for the long term.

Buffett’s investment performance is difficult to explain, in part, because Berkshire Hathaway defies easy categorization.  The company is a curious hybrid between an investment fund and an operating company.   Berkshire Hathaway owns a substantial number of minority positions in publicly-traded companies, positions that have a current market value of around $90 billion.  These positions include large pieces of companies such as Coca-Cola, Wells Fargo and American Express.  Read More