At the beginning of the twenty-first century both Warren Buffett and Bill Gates were identified to be the richest individuals in the world. Yet, the two individuals could not be more different from each other. Bill Gates, the founder of Microsoft Corporation, is an Information Technology entrepreneur, whose creative imagination and hard work made Microsoft the leading software company in the world, with its products being used widely. Warren Buffett’s genius, on the other hand, is not so much in imagination and entrepreneurship, as it is in patience and adherence to principles. Buffett had once stated that ‘laziness’ is a virtue as far as long-term investment strategies go. And one can see the application of this in is own investment strategies, where he rarely shuffles his portfolio around. This principle goes against modern portfolio management theory as well, where its practitioners believe in ‘actively’ managing the set of stocks in their portfolio. But the superiority of Warren Buffett’s principle is proven by the impressive return on investment that Berkshire Hathaway has given its investors (Nace, 2008).
The relevance of contrasting modern portfolio management theories to that of Buffett’s old-fashioned adherence to ‘value investment’ principles need elaboration. To take an example, when the entire investment community was riding the dotcom boom, Buffett strictly avoided the entire sector. This was due to his belief in the idea of ‘circle of competence’. Warren Buffett had modestly admitted in interviews that he doesn’t fully comprehend the business model of a dotcom company and hence the entire sector is outside of his circle of competence. In the long and illustrious career of Warren Buffett and his firm Berkshire Hathaway, this modesty proved to be a crowning jewel. As the rest of the global economy crumbled due to the bursting of the dotcom bubble, Berkshire Hathaway’s chosen set of stocks were able to absorb the shock due to their insulation from the unknown domain of Information Technology (Nace, 2008). Coming back to the reverence to Bill Gates, it is a remarkable fact that Warren Buffett had never held the stock of Microsoft Corporation in his portfolio. To the contrary, Buffett had always felt most comfortable with the business model of insurance companies, and hence picked companies from this sector while totally avoiding Information Technology stocks. Old fashioned as it might sound, the robust results shown by Berkshire Hathaway is for all to see. This also reiterates Buffett’s rationale behind ‘less diversification’. Contrary to modern portfolio theories, Buffett actually saw diversification as increasing the potential for loss. (The Essays of Warren Buffett, 2009)
Buffett, Warren; Cunningham, Lawrence. The Essays of Warren Buffett: Lessons for Corporate America, Second Edition. The Cunningham Group. ISBN 978-0-9664461-2-8.
Schroeder, Alice (2009). The Snowball: Warren Buffett and the Business of Life. Random House. pp. 656–657. ISBN 978-0553384611. Excerpt available at Google Books.
Ted Nace, “The Education of Warren Buffett: Why did the guru cancel six coal plants?”, Gristmill, April 15, 2008
Warren Buffett’s Letters to Shareholders”. Berkshire Hathaway. Archived from the original on 2007-03-22. http://web.archive.org/web/20070322071600/http://www.berkshirehathaway.com/letters. Retrieved 2008-05-20.
Sullivan, Aline (1997-12-20). “Buffett, the Sage of Omaha, Makes Value Strategy Seem Simple: Secrets of a High Plains Investor”. International Herald Tribune. http://www.iht.com/articles/1997/12/20/mbuff.t.php.