Inside the Investments of Warren Buffett: Twenty Cases by Yefei Lu

Yefei Lu gave his insights from Warren Buffett’s investments by analysing the twenty investments that Warren Buffett made during his career starting from his early years to current times from an investment analyst’s viewpoint. In the book “Inside the Investments of Warren Buffett”, Lu tried to take the perspective of an investment analyst studying the business at the same time when Buffett made the investment decisions so as to understand Buffett’s standpoint.

If you want to get the main ideas of how we can learn from Buffett’s investment approach, go to the last section “Lessons Learned” where Lu explained how Buffett’s investment strategy changes from his early years investment to the later years and what lessons we can learn about making investments decisions from Buffett.

Early in Buffett’s investment career

Buffett invested in companies that traded at incredibly cheap prices compared to the assets the companies held. Not only did he make use of Graham’s method of investing in net-net companies, Buffett also considered the companies’ fundamentals such as positive earnings and positive developments in the businesses. Buffett also focused on the management team of the companies, selecting great operating managers.

The middle years of Buffett’s investment career

By then, Buffett focused more on quality of the business, looking at the sustainable earning power rather than the assets. Buffett was willing to pay higher earnings multiple for companies he deemed great. Buffett would look at both quantitative and qualitative aspects. He did not obsess on extremely high growth companies, but quantitatively preferred companies that had consistent growth and high return on tangible capital employed. Qualitatively, Buffett has the ability to have deep insights and strong knowledge of the business he invested in. Buffett continued to look for management that are trustworthy and have operational ability, but also valued managers who are capable of allocating capital wisely.

Buffett’s later years of his career

By now, Berkshire Hathaway has become a huge investment vehicle and it has become a challenge to invest huge amounts of capital. Although Buffett’s focus shifts to large companies, his strategy remains to invest in businesses that he understands fundamentally. Buffett aimed to deploy large amount of capital wisely with a reasonable rate of returns. Buffett also chose to have several different classes of shares, with preferred shares or convertible shares with fixed-income characteristics. He was willing to compromise with slightly lower returns for being able to deploy huge amounts of capital.

Insights from Buffett’s several decades career

The author find astounding that Buffett did not just focus on cheap businesses, or businesses with high return on capital, or growth stocks, or value stocks. Instead Buffett’s investment strategies evolved based on what were present in the market, his own personal development, as well as the amount of capital he managed. But the criteria for trustworthy and capable management team remained.

Insights from Warren Buffett’s Investments

Using an investment analyst’s viewpoint, Lu drew these lessons by studying the twenty investment cases of Buffett.

  1. Getting quality information is the key
    Buffett believes in conducting fundamental research and investing in concentrated fashion once research was done. Investing, according to Buffett, should be like a punch card with only twenty holes, each representing one investment the investor could make over a lifetime.Lu discovered that the companies that Buffett invested had abundance of relevant objective data available either in annual reports or industry data. Buffett also focused his investments on a selected few industries, which helped to hone his knowledge of what is high-quality information and to deploy the knowledge repeatedly. We can say Buffett invest in his circle of competence.With the large objective information and investing in his circle of competence, Buffett was able to confidently make concentrated investing in selected few companies.
  2. Consistency of earnings growth is important
    Although it seemed to most investors who follow Buffett that he invested in “high quality” business (enduring brand name) or a “compounder” with high returns of capital, what Lu found is that the more important criteria is consistency of revenue and earnings.
    Lu stated that majority of the twenty cases had extremely consistent revenue and earnings growth in the years preceding Buffett’s investment. Many have revenue or earnings growth for nine out of the previous ten years.
    Lu advised that instead of explicitly looking for “moats” (durable competitive advantage), one should have objective data to back up this claim. Else, the moat might only be in theory but does not translate into positive financial results for the company in reality.
  3. Let opportunities drive your investment style
    Most investors define their investment strategy by one approach, whether it is “value”, “growth” or “event driven”.
    Buffett matched his investment strategy by looking at market conditions and his own investment setup. Also, Buffett did not force one investment style upon the market and took advantage of the opportunities that present themselves. When opportunities seemed to be drying up, Buffett did not compensate by loosening his investment criteria. For example, in 1968, when he could not find opportunities, he disbursed his partnership rather than compromise on his investment criteria.
  4. Strong management is the key
    What has remained constant in Buffett’s approach is his focus on good management. For many of the twenty cases, Buffett had known the management for years before his investment. When Buffett owns a company, he also gives much time to oversee and support the management.
    One criterion Buffett looks for is a history of operational success under the management. Buffett especially values owner-managers. Buffett believes that a manager should have utmost integrity and he values managers with the ability to allocate capital wisely.

Can we replicate Buffett’s investments strategy?

Lu concludes that from his analysis of the twenty investment cases, he sees that a fair number of them would be possible for a private investor, especially investments made in the later part of Buffett’s career. Even for private transactions, the lessons learnt could be applicable to similar public company opportunities. The primary limitation could be that Buffett found on average only several good investment opportunities each year although he devotes to doing research on a full-time basis. But Lu feels there is hope. Lu concludes that if other investors are willing to devote significant amount of time and be patient, they too can apply many of the lessons in Buffett’s investments to improve their own investment approach.

Read “Inside the Investments of Warren Buffett” for free from the library

To gain the lessons learnt from the detailed analysis of each investment case, get the book “Inside the Investments of Warren Buffett” by Yefei Lu. If you prefer to borrow the book, you can get it from NLB (National Library Board), call number 332.6 LU-[BIZ].

Inside the Investments of Warren Buffett by Yefei Lu