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Welcome to a new lesson in the Financial Freedom Plan course. In this lesson, we're going to learn about the investment strategy or philosophy of Warren Buffett, one of the most influential figures in the world of investing. Perhaps you don't know Warren and are wondering who he is. Who did Buffett play?
Buffett is one of the most influential people in the world of investing and business, nicknamed the Oracle of Omaha. He's the chairman of Berkshire Hathaway, the company where he makes investments. An investor always knows the most successful people in the world. In 2018, he was the richest person in the world, surpassing people like Bill Gates, founder of Microsoft, and Bill Gates, founder of Amazon.
In 2020, he was the fourth richest person in the world. So, as I was saying, when we talk about value investing and long- term investing, what is Warren Buffett's investment philosophy or strategy? Let's see what it's about. How does Warren Buffett think? He believes in value investing, investing in...
Assets that are undervalued, or cheap, or expected to increase in value over time, it's important to remember that value is not the same as price. Sometimes we can pay a price for something that has a higher value than what we paid for it, or conversely, we can buy something expensive and its value doesn't match what we paid.
It's crucial to keep this discrepancy in mind in the world of investing. This will help us understand Warren Buffett's investment philosophy. Let's consider an example: suppose we are introduced to Netflix when it first started. That's why I'm showing you the old logo, one of the company's first logos.
We learn about it, we ask ourselves, " What is Netflix all about?" We do a fundamental analysis of what Netflix is, what it aims to achieve over time, how it intends to achieve it, and essentially its value proposition, its plans, its business plan, among other things. And this hypothesis arises; a lightbulb goes off in our head: Netflix might be worth more than it is today.
The passage of time will increase in the future. Let's imagine we did this in 2010, and what happens today? Today, Netflix sharesโwhen preparing this lesson, I pulled an exclusion from Investing.comโand we realize that the value of Netflix shares is $494. We were thinking of investing in this company in 2010, and look, in 2010, these shares were worth $50.
So, if we had made an investment in 2010 and held the shares throughout this decade, we would have seen a 1000% return, which means a tenfold increase in value. Something that was worth $50 is now close to $500, ten times what we paid. That would be Warren Buffett's investment philosophy: buy something that I believe will increase in price, that will be worth more in the future, as has happened with Netflix.
Despite its ups and downs, we think long-term. Warren Buffett's strategy, his philosophy, doesn't imply holding assets for all Whatever happens, naturally, if a lower future value is anticipated, he believes that sometimes you have to sell and realize profits, but he does believe in long-term investing.
If we examine Berkshire Hathaway's investment portfolio, we can find companies like American Express, the credit card company, which he bought for one billion dollars and today has a market value of 18 billion dollars. He bought Apple shares at one point for 31 billion dollars, and today those shares are worth 120 billion dollars, and so on.
Look at the portfolio that Warren Buffett has; it has companies like Coca-Cola, for which he paid 1.3 billion dollars, and that position today is worth almost 22 billion dollars. He has positions in Chevron Corporation, General Motors, Moody's Corporation, and so forth. As you can see, the investment portfolio that Warren Buffett and his financial arm, Berkshire Hathaway, have is one of the most important aspects to highlight about Warren Buffett's Berkshire Hathaway portfolio.
From its founding in 1965 to the present day, if we look at the annual returns this company has obtained year after year and calculate an average, we see that each time it has obtained an average annual return of 20%, higher than the 10.2% return we would have gotten from investing in the 500 stocks that make up the Standard & Poor's 500 index.
So, in a way, with its investment philosophy, it has outperformed the market, so to speak. There have been years where its investments have yielded much less than the Standard & Poor's, and there have been years where its investment portfolio has generated losses while the Standard & Poor's has generated gains.
But if we take the entire period between 1965 and 2020, on average, it has obtained double the return of the Standard & Poor's 500. And what is the significance of that? The significance is the following: if we had invested $100 in Berkshire Hathaway stock in 1965, when it was founded, and we had invested $100...
Let's imagine that at that time, if we could invest in the Standard Poor's 500 index, or buy shares of the five hundred companies that make up the index, what happens in 2020? In 2020, with the investment in Berkshire Hathaway, we would have had $2,810,526. Imagine the return! And in the case of the Standard Poor's 500, we would have only obtained $23,454.
In both cases, we would have obtained significant gains. We started with $100, and what happens later? Almost 40, sorry, almost 60 years later, we would have had much more capital than our $100. But look at the abysmal difference between what we would have obtained investing in Berkshire Hathaway versus Berkshire Hathaway and the Standard Poor's 500.
So, the income that Warren Buffett has obtained with his investments is truly insane. In fact, if we express it as a percentage, it's quite remarkable. The cumulative percentage return that Versar has obtained each way since its founding until 2020 is going to be hard to say. Two million 810 thousand 526 percent return is crazy versus 23 thousand 454 percent return for SUNP and 500.
The difference is abysmal. So, Warren Buffett is a person who strongly believes in this formula that we reviewed in the module on how to build wealth. He strongly believes in saving and return on investment, and this is the key, this is where he stands out. Perhaps he invests in things that he believes will have value and holds them over time.
He holds them over time because he is convinced that, over time, despite the ups and downs, despite the crises, despite the falls, in the long run, they will increase, they will grow. So that is the investment philosophy of this gentleman, the Oracle of Omaha, Mr. Warren Buffett, always in the top 20 of the ranking of the world's richest people.
And below we present some quotes that define a bit of his way of thinking, his philosophy. The strategy this gentleman follows, some of Warren Buffett's first quotes: " Price is what you pay, value is what you get." This alludes to the disparity between price and value. "The price you pay, the value is what you get.
Remember that, whether we're talking about socks or stock." "I like to buy quality products when they're discounted." This Warren Buffett quote is very useful for the topic of investing. Another very, very important quote is: "It's much better to buy a wonderful company at a fair price than a fair company at a wonderful price." He invests in value.
He says, "It doesn't matter if the price is fair; I'm more interested in the company being wonderful." And another quote Warren Buffett gives us is: "If you 're not prepared to own a stock for 10 years, don't even think about owning it for 10 minutes." This last quote perhaps reflects a large part of his philosophy: you have to buy stocks, or in general, make investments that you are willing to hold for a long period.
Otherwise, if you have doubts, it's best not to even think about making that investment. So that's the strategy of Warren Buffett's investment philosophy. Buffett is very important since we're talking about leveraging our wealth, so that's what we're trying to convey in this class. See you in future lessons of this course, "Plan for Financial Freedom," because we're also going to learn about other investment philosophies. See you!
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