Warren Buffet has followed the investment strategy prescribed by Graham School of Thought throughout his whole investing life and the strategy is known as “value investing”. Value investing takes a long term approach towards investing and believes that the real value of the company is a combination of its net assets and real earning power. Thus, it’s very important for value investors to be able to predict future with some certainty to calculate the potential earning power of a company. It is not surprising that value investors such as Warren Buffet have been known to invest in companies only if they understand them. Value investors shy away from overly ambitious projections that usually plague tech stocks. Warren Buffet has refused to invest in technology stocks because he claims he doesn’t understand them and can’t predict their future (Yang).
Warren Buffet has a history of investing in companies that have market leader positions and enjoy strong barriers to entry. These competitive advantages help them enjoy steady stream of cash flows and take advantage of scale. Examples include Coca Cola, Geico, Gillette (which was purchased by P&G and now Berkshire holds stake in P&G). This is why Buffet didn’t hesitate from paying $44 billion for Burlington Northern Railroad because he knows that Burlington Northern Railroad enjoys core competencies that are very hard to replicate and will shield it from competition such as huge startup costs, extensive network of railway tracks around the country, and capital intensive market structure. This will ensure a steady stream of profitability and cash flow and enjoy the company to further improve efficiency through scale. Buffet notes in his 2010 letter to shareholders that railroads have major cost and environmental advantages over trucking and over time, the movement of goods in the United States will increase. Buffet also estimates that railroad will increase Berkshire’s normal earning power by nearly 40% pre-tax and well over 30% after-tax (Buffet).
Berkshire’s companies will fare well after Buffet’s departure because they all enjoy favorable economics, strong market positions, and are being run by Buffet’s trusted and longtime managers. Buffet’s historical emphasis on the nature of the business will serve his shareholders well because management keeps changing but business economics are more durable in nature.