How the Oracle of Omaha tackles an Angry Bear seeking Honey

22 December 2014


Who is the Oracle of Omaha?
Warren Buffett is the President, Chairman and Chief Executive Officer of the most successful investment company the world has ever seen – Berkshire Hathaway.Berkshire Hathaway is an American multinational conglomerate holding company headquartered in Omaha in the United States. The company oversees and manages a number of subsidiary companies. It wholly owns GEICO, BNSF, Lubrizol, Dairy Queen, Fruit of the Loom, Helzberg Diamonds, Flight Safety International, and Net Jets, owns half of Heinz and an undisclosed percentage of Mars Incorporated. In addition Berkshire Hathaway has significant minority holdings in American Express, The Coca-Cola Company, Wells Fargo, IBM and Restaurant Brands International.
Over the last 49 years Berkshire Hathaway has averaged an annual growth in book value of 19.7%. For comparative purposes the S&P500 has only managed 9.8% in the same period.
Given these returns it is not surprising to find that Warren Buffett is often referred to as the Oracle of Omaha.

How Warren Buffett approaches a bear market
Warren Buffett’s approach to a bear market is exactly the same as his approach to normal trading conditions with one exception. Buffett looks at a bear market as an opportunity to purchase stock in “good companies” at reasonable or bargain prices (since the bear market has the obvious effect of depressing stock prices).So what constitutes a good company?
Well first Buffett takes a long term, large scale, business value investment approach to his investment selections. In simple terms he concentrates on investments in companies that have good fundamentals and intrinsic business value. Central to this is a focus on companies that have a “durable competitive advantage” over others operating in the market.
This means he focuses his investment activity on companies that have established market position and market share, have an established and valued brand, or in some form have a competitive advantage over others including possible new entrants into the market place.

A summary of the investment philosophy of Warren Buffett

Looking at the nature of the investments Berkshire Hathaway has made in the past it is clear that there are common characteristics shared by the investments made. These characteristics are valid criterion for selecting investments in all market conditions including bear markets.
In bullet form the criterion used are:

  • Invest in companies in industries that are growing or clearly have the potential to grow in the medium to long term.
  • Look to invest in companies that enjoy a “consumer monopoly” because they possess a loyalty commanding brand and are able to lever that brand and introduce new products.
  • Invest in companies that are less vulnerable to attack by competitors because they have some form of natural protection from new entrants to the market.
  • Invest in companies that have earnings on a positive track with good and consistent gross and net profit margins.
  • Invest in companies that have low debt to equity ratios.
  • Invest in companies that consistently provide a high return on capital employed.
  • Invest in companies that have proven track record of retaining profit for reinvestment in new business opportunities.
  • And above all avoid investment in companies that have high maintenance costs and or high capital investment costs either in reality or planned.
Don’t be tempted to convert all your honey to cash in a Bear Market
The natural reaction of the average investor when he sees the hungry bear stomping over the field heading in his direction is to sell his honey and retreat to cash over both the short and medium term.Buffett has always seen this as a mistake.  If the investor sticks to cash over the medium term the value of the cash he holds will be quickly eroded especially as the market begins to recover from the bear attack.
Why we all can’t be Warren BuffettLet’s not kid ourselves here. Warren Buffett has a significant advantage over the average investor.First he employs an extensive research and analytical team that is able to sort through mountains of data before reaching an investment decision. The average investor will never be able to do this unless he outsources the management of his portfolio to a professional third party.

Second, Buffett through his investment vehicle Berkshire Hathaway, has substantial cash resources that allow him to invest billions of dollars into his chosen investments. This ability to inject significant cash into businesses allows him to negotiate special conditions and opportunities that are simply not available to the average investor. Consequently his investments are often in the form of a secured stock with a guaranteed and preferred dividend (more often than not with future stock warrants attached as well).

This doesn’t mean that we can’t learn from his approach to investing particularly when we see an angry and hungry bear on the horizon in search of honey.

It’s not all bad news or why you have more options than Warren BuffettThe number of potential companies that Warren Buffett can invest in is greatly restricted because he needs to make massive investments into those companies in order to generate the level of returns that will satisfy the shareholders of Berkshire Hathaway.
The average investor is not restricted in this way.

Conclusions  
Always consider investments over the medium to long term
Warren Buffett’s strategy for dealing with an angry hungry bear is really quite simple because his strategy doesn’t really alter from his normal approach to investment.In other words he looks at a downturn as an investment opportunity and he never wavers in his approach of looking at potential investments over the medium to long term.Buffett’s criterion for selecting investments is as valid in a bear market as it is in a bull market. It’s a simple philosophy that can be summed up as simply as no matter how pressing the circumstance always looks at threats as an opportunity.

That’s not a million miles from saying you should always look on the bright side of life.
I take this opportunity to wish you all a very happy holiday season, and of equal importance, a very prosperous new year.

If you need help tackling bears or want to discuss your portfolio and potential investment strategies please contact us at 1-868-628-1175. Ask to speak to Osmond or Ihsan or email at info@nullfirstlinesecurities.com.

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