August 1, 2021

Only fools never change their mind

Warren Buffett (Photo: Getty Images)

GUEST BLOG. One of the facets that I admire the most about Warren Buffett is that he has been able to adapt and adjust his way of investing over the many decades of his career as an investor.

Initially, in the 1950s, he was very successful investing in securities with a lot of “value,” securities that he could buy at $ 0.50 when he valued them at $ 1. It was essentially the method instilled in him by his mentor and teacher, Benjamin Graham. Back then, Buffett didn’t pay much attention to the quality of a business yet, as long as he could buy the stock at a steep discount to his estimate of its intrinsic value.

Over the years, his way of seeing things has changed and he has started to pay particular attention to the quality of a company, to the sustainability of its business model. Mr. Buffett often repeats that it was thanks to his long-time partner, Charlie Munger, that he adjusted his way of investing.

I believe that one of Berkshire Hathaway’s first investments that confirmed its new focus on quality businesses was its purchase of See’s Candies, a candy and chocolate maker, acquired in 1972 for US $ 25 million. See’s had already developed a recognized trademark in California and had a loyal following. In addition, the company’s business model required little capital and generated significant free cash flow, while achieving high profit margins. In Berkshire Hathaway’s 2019 annual letter to shareholders, Buffett mentions that, since its acquisition in 1972, See’s Candies had generated pre-tax profits of over $ 2.0 billion for Berkshire.

Open up horizons

This investment, in my opinion, set the stage for further investments by Berkshire Hathaway in high quality companies such as Coca-Cola in 1988 or the acquisition of the rest of the insurance company GEICO in 1996.

Then, Berkshire Hathaway acquired all of the non-owned shares of Burlington Northern Santa Fe (BNSF) in 2010 for nearly US $ 34 billion. To my knowledge, prior to this investment, Berkshire had never invested in the railway industry. Here again, Buffett relied on the particularly high barriers in the sector and on the sustainability of BNSF’s business model.

More recently, Buffett surprised many when Berkshire Hathaway became one of Apple’s largest shareholders. The company now owns more than 5% of the shares of this technology company. Yet Buffett had always said that technology was outside his circle of competence! However, as of December 31, 2020, the cost of Berkshire Hathaway’s investment was around US $ 31.1 billion while its value was US $ 120.4 billion, a capital gain of nearly US $ 90 billion.

The evolution of Buffett’s way of investing is remarkable and I think it sets an example for investors to follow. For our part, about two years ago, we made the strategic decision to broaden our horizons and no longer exclude the securities of foreign companies in our investment universe. Yet, we have always said that we prefer to invest in North American companies that do business internationally rather than invest directly in foreign companies. I myself wrote a blog about it in 2014.

I would add that if you want to gradually expand your circle of expertise as an investor, you have to be prepared to step outside that circle somewhat – that’s the only way to keep improving. The decision to expand our horizons internationally has allowed us to find a few quality companies at good prices in recent years. Only fools never change their mind.

Philippe Le Blanc, CFA, MBA

Chief Investment Officer at COTE 100