Learn how Warren Buffett became the business magnate that he is today
What asset allocation strategy does Warren Buffett propose for retirement?
In a 2013 letter to Berkshire Hathaway shareholders, Warren Buffett noted an investment plan for his wife that seemed to contradict what many experts suggest for retirees. He wrote that after he passes, the trustee of his wife's inheritance has been told to put 90% of her money into a stock index fund and 10% into short-term government bonds. Most often, investors are told to scale back on their percentage of stocks and increase their high-quality bonds as they age to better protect them from potential market downturns, so this announcement was unusual for many to hear. However, it’s important to note that he said the 90/10 split doesn’t make sense for every investor.
How does Warren Buffett choose his stocks?
Warren Buffett's strategy for picking winning stocks starts with evaluating a company based on his value investing philosophy. Buffett looks for companies that provide a good return on equity over many years, particularly when compared to rival companies in the same industry. When looking for a great company to invest in, Buffett also reviews a company's profit margins to ensure they are healthy and growing. Buffett focuses on companies that provide a unique product or service that gives them a competitive advantage; he also focuses on companies that are undervalued that he can purchase at a good discount.
Why did Warren Buffett invest so heavily in Coca-Cola?
The stock market crash of 1987 created some attractive opportunities for investors, as all stocks were sold off with little regard to their fundamentals. Coca-Cola was an example. Warren Buffett understood that no competitor was going to appear and take away Coca-Cola's market share. Warren Buffett bought more than $1 billion in Coca-Cola (KO) shares in 1988, an amount that was then equivalent to 6.2% of the company. The purchase made it the single largest position in Buffett's Berkshire Hathaway's portfolio at the time. Coca-Cola heralded a change in Buffett's approach from "buying bad companies at great prices" to "buying great companies at good prices."
What is Warren Buffett’s diversification quote?
Warren Buffett famously stated that "Diversification as practiced generally makes very little sense for anyone that knows what they're doing.. .it is a protection against ignorance." In his view, studying one or two industries in great depth, learning their ins and outs, and using that knowledge to profit from those industries is more lucrative than spreading a portfolio across a broad array of sectors so that gains from certain sectors offset losses from others. The problem with diversification, in Buffett's view, is although the risk is managed and mitigated by sector gains offsetting sector losses, the opposite is also true.
Why doesn't Warren Buffett split Berkshire Hathaway stock?
Legendary value investor and Berkshire Hathaway CEO Warren Buffett has never allowed a stock split of his company's Class A shares, reasoning that to do so would counter his basic buy-and-hold investment philosophy. By refusing to split Berkshire Hathaway's Class A stock shares, Buffett seeks to attract investors after his own heart—namely, those interested in long-term plays, who have extended investment horizons. He has remained true to his stock-splitting principles in the 60-odd years he has helmed Berkshire Hathaway.
Warren Buffett invented the “90/10" investing strategy for the investment of retirement savings. The method involves deploying 90% of one's investment capital into stock-based index funds while allocating the remaining 10% of money toward lower-risk investments. This system aims to generate higher yields in the overall portfolio over the long-term.
Derivatives Time Bomb
"Derivatives time bomb" refers to a possible market deterioration if there is a sudden unwinding of derivatives positions. The term is credited to Warren Buffett, who believes that derivatives are "financial weapons of mass destruction." A derivative is a financial contract whose value is tied to an underlying asset. Common derivatives include futures contracts and options. The issues with derivatives arise when investors hold too many, being overleveraged, and are not able to meet margin calls if the value of the derivative moves against them.
Look Through Earnings
Warren Buffett coined the concept of look-through earnings as a way of dealing with what he perceived as accounting limitations on balance sheets. Look-through earnings consist of both monies paid out to investors and funds reinvested by a company. According to Buffett, look-through earnings are a more realistic portrayal of a firm's annual gains and therefore provide a better picture of its actual value to investors.
The Buffett Rule proposed a 30% minimum tax on people making more than $1 million a year. It was part of President Barack Obama's 2011 tax proposal. It was named after Warren Buffett, who criticized a tax system that allowed him to pay a lower tax rate than his secretary. The Buffett Rule contends that the tax system is not fair because it puts a greater proportional tax burden on wages than it does on investment income. The goal of the Buffett Rule is to bring about tax relief for the middle-class and below.
Explore Warren Buffett
Berkshire Hathaway. "2013 Letter to Shareholders." https://www.berkshirehathaway.com/letters/2013ltr.pdf
Forbes. "Warren Buffett." https://www.forbes.com/profile/warren-buffett/?sh=2193877e4639