Warren Buffett, hailed as one of the greatest investors of all time, built his fortune through careful, calculated value investing . But with the rise of technology stocks, cryptocurrencies, and changing economic dynamics, does his tried-and-true approach still hold water? Or has the game of investing changed for good?
In this episode, Tash and Ana seek to find out with the help of Brandon van der Kolk from New Money.
Who is Warren Buffett, and do people still follow him?
Warren Buffett is often called the world’s greatest investor, and with good reason. He has managed to achieve an average return of 20% per year since 1965, a feat no other investor has matched over such a long period. Many investors look to Buffett for guidance, but some argue that his strategies might be outdated in today’s fast-paced financial markets.
Buffett follows a value investing strategy based on four key pillars:
- He ensures he understands the business he is investing in.
- He looks for companies with a strong competitive advantage or "moat."
- He assesses the management team for skill and integrity.
- He only buys shares when they are available at a margin of safety price.
(Learn more about Warren Buffett’s investing philosophy )
This strategy has served him well for decades, but as markets evolve, does it still hold up?
Why Buffett avoids certain investments
Buffett is known for steering clear of particular assets such as gold and cryptocurrency . He argues that assets like Bitcoin do not produce cash flow, making it impossible to determine their intrinsic value.
"It doesn't produce any cash, and if it doesn't produce cash, then you as the investor can't figure out what its intrinsic value is," says Brandon. Buffett sees Bitcoin as purely speculative – its value is entirely dependent on the next person being willing to pay more for it than you did.
His reluctance to invest in cryptocurrency is not necessarily because he believes it has no future, but rather because it does not fit within his value investing framework. He applies the same logic to gold, stating that since it does not generate income, it is difficult to determine what it should be worth.
Tash ponders: "Do you think any part of his strategy is getting a little bit outdated, like, for example, his take on crypto? Do you think that's going to be left behind a little bit soon?"
Brandon doesn't think so: "His principles will last because his principles are more around human psychology than anything else."
Buffett's cash position – does it signal a market crash?
One of the biggest talking points about Buffett recently is the massive cash reserves held by Warren Buffett's company, Berkshire Hathaway – approximately US$325 billion. This has led some to speculate that he is predicting a market crash .
However, there are other explanations for this large cash reserve:
- The risk-free rate for US Treasuries is currently high (around 4.5%), making it a relatively safe place to park money.
- As Berkshire Hathaway grows, it becomes harder to find investments large enough to "move the needle."
- Buffett prefers to hold large amounts of cash due to Berkshire’s exposure to the insurance industry. Large claims from natural disasters require readily available funds.
"I've also heard it's hard for him to invest in stuff these days because he owns so many different companies already. And there's limits on how much he can invest in certain companies. Is that true?" Tash asks.
Brandon confirms it is.
"He's spoken about that in his most recent shareholder letter," he says, "and basically their size [limit Berkshire's options]."
Can everyday investors follow Buffett’s strategy?
Buffett himself has stated that most investors should not try to emulate his stock-picking approach . Instead, he recommends buying broad market ETFs and holding them long-term.
"He's spoken to LeBron James, and LeBron has asked him: ‘How do you think I should invest my money?’ Warren Buffett just said to him: ‘Just buy ETFs,’" Brandon explains.
Buffett advocates for passive investing through index funds for most people, as it requires less time and expertise than stock-picking. Value investing can still work for individual investors, but it requires a lot of research.
Ana agrees: "I love the idea of value investing, but it just seems so time-consuming – and that's the big thing when people compare themselves to Warren Buffett. He has time for his investments, so he's able to dive deep into them. For myself, that is just not an interest of mine."
Has Buffett made mistakes?
Even the world’s greatest investor has made poor decisions. Buffett has admitted to making several bad investments, including:
- Investing in Salomon Brothers, which was embroiled in scandal.
- Buying airline stocks, which he later sold at a loss.
- Missing out on major tech investments, such as Apple, until relatively late.
Despite these mistakes, his overall investing strategy has led to incredible success.
"He’s made hundreds of investments that have turned out poorly, yet he's still made 20% per year," Brandon explains.
Buffett himself has stated that most of Berkshire Hathaway’s value today can be traced back to just 12 major investment decisions.
Is Buffett’s strategy outdated?
Some argue that Buffett’s reluctance to invest in technology and cryptocurrency means he is behind the times. However, his core principles remain valid because they are based on fundamental human psychology and market cycles.
"These days, things blow up so much more quickly with the internet and access to information, and a lot of money is going into super funds, for example," says Tash. "Do you think things will always return back to being good value at some point?"
Brandon suggests: "The market can stay irrational longer than you can stay solvent, meaning prices can remain overvalued for a long time. But in the long term, stock prices revert to where they ought to be. Similarly, market crashes often push stocks below their fair value before rebounding when optimism returns."
Buffett also believes that no matter how much speculation drives prices up or down in the short term, businesses will ultimately be valued based on their earnings and long-term potential .
Should investors take cues from Buffett?
Investors can still learn a lot from Buffett, but the trio argue people shouldn't blindly copy him. His investing decisions are influenced by factors that do not apply to individual investors, such as Berkshire Hathaway’s size and insurance commitments.
For most people, a diversified, passive investing strategy is a solid option. "Buy and hold ETFs, and then maybe you can buy some Bitcoin and stock pick on the side," Tash suggests.
Ultimately, Buffett’s principles of value investing remain relevant. But whether investors choose to follow his specific strategy depends on their risk tolerance , time commitment, and investing goals.
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Happy investing!
