Warren Buffett, one of the most successful investors over the last fifty years, runs an investment holding company called Berkshire Hathaway. His investment philosophy has been to buy an outstanding company he understands, at a fair value, and hold it forever. He was an early investor in old-school businesses such as Coca Cola, Geico insurance company, Walt Disney and American Express. He still owns their shares and they are still very solid businesses. Over the last two decades, however, we have seen the emergence of the companies operating on the internet. These new generation businesses were not something Warren understood and although he became good friends with Bill Gates, he never invested in Microsoft because he never understood it.
Warren Buffett is the buy-and-hold type of investor and although this has worked very well for him, he has missed out on companies that have revolutionized the way we live. Had he tweaked his investment style just a little to incorporate the new generation FAANG stocks, he would have done much better for his shareholders. He did budge a little in his later life and bought some Apple shares. Just to get an idea of the scale of outperformance of technology shares over the last ten years, see the graph below.
The opposite investment style is that of the chop-and-change investor. People imagine they can outperform the market by timing their entry and exit points but this rarely works for any length of time. The biggest mistake such investors make, is to sell their good companies when they see some volatility and then believe that they will be able to buy back at a lower price. The reality is that after a dip, the price recovery can be so sudden that the investor never gets the chance to buy back in and he or she remains stuck with cash.
There is a third investment style that should be considered. As with the Warren Buffett approach, you should only buy companies that offer something unique and at a fair valuation. The entry point to any investment is important. Then you have to scoop some of the profits off the top as the relative percentage of the holding increases above your target and redeploy into companies that offer you better value with the same quality. This should be a gradual process and based on new opportunities in our ever changing environment. This investment style is not easy and requires a lot of work but will prevent you from either being invested in a portfolio that has fallen behind the times, or being too active and end up chasing your own tail.
