What Would Young Buffett Buy?

Everyone wants to invest like Warren Buffett. He is the 3rd richest man in the world and the namesake for this site. He has made a fortune over the past 50 years with his shrewd investment strategy. Buffett has always been a value investor looking for strong companies selling at a discount. Buffett’s top holdings are Coca Cola, Wells Fargo, American Express, Proctor & Gamble, and Kraft. Have you noticed a trend?

The top 10 stocks in Warren Buffett’s portfolio are all large cap stocks. These are all blue chip companies with excellent free cash flows and solid dividends. Why does Buffett have so many large cap companies? Billionaire Buffett has to buy large cap stocks because it would be impractical for Buffett to have a portfolio of small cap stocks. With a $48 billion dollar portfolio, Buffett would have to buy millions of smaller companies to make effective use of his capital.

The interesting thing is that young Warren Buffet was a different investor. Young Buffett invested heavily in small and mid sized companies. His purchase of Sanborn Maps in 1960 is a good example of this. Buffett’s partnership placed 35% of the partnerships funds in this one investment. He saw a great opportunity and invested heavily in it. He did the same thing when his company purchased See’s Candy in 1972.

Let’s take a look at how a young Warren Buffett built his fortune.

1. Invest heavily in your best idea.

Let’s be clear, I am not suggesting that you put 100% of your money in any one investment. You should however be willing to invest 20 to 30% of your money in your best ideas. Too many people overly diversify. They allocate the same amount of money to their best ideas as to their worst one. Buffett protégé Monish Pabrai discusses the importance of making big bets infrequently in his book The Dhandho Investor. I may buy a bunch of different stocks for my personal portfolio but I put most of my money in my best ideas.

2. Invest in stocks whose best growth potential is ahead of them.

Young Warren Buffett was not the billionaire that he is today so sometimes he would have to sell a position to enter another one. Buffett would sell a stock with 20% upside potential for a stock with 50% upside potential. You have to be willing to give up a good opportunity for a great one. That’s why I am not a big fan of loading up on companies with huge market caps. A company with a market cap of $200 to $300 billion will have a difficult time doubling in value compared to a company with a market cap of $1 billion dollars. Buffett bought companies like Coca Cola and Gillette doing their heydays.

3. Invest in companies that are off the map.

An investor’s biggest advantage is in being able to invest in opportunities that others don’t know about. Buffett never invests in the “hot sectors”. Stay away from the must buys that you see on CNBC and other business channels. The best time to buy a stock is when it is out of favor. Financial experts and market strategists hate financials right now so that tells me that financials are the place to invest.

Well, I hope that you find this information useful in helping you shape your investment strategy.

Comments

  1. avatar minifesto says:

    Great comment. Size and age make a difference. Buffett says he buys what he understands. I am 76 and have been investing for over 50 years mainly in oil, forest products and electronics. I became more and more interested in companies with high R&D. This lead me to biotechs and for the last 14 years I have focussed heavily on biotechs. My background is finance, informatics and international management. Over the last year I have learnt a lot about diseases and drug development. It has been profitable and a lot of fun but you have to have a strong stomach for failures.

    • avatar Mark says:

      Biotechnology…..That is an area that I need to learn a lot more about. It sounds like you have become quite the successful investor. Thanks!

  2. Sander’s Maps has been relegated to the dustbin of history along with many of Buffett’s early investments, but See’s has been a phenomenally successful investment any way you measure it and funded many of his other purchases (there is a big difference between buying the stock of a company and buying the whole company). The young Buffett was an investor in cigar butts. I rather invest like the middled-age to old Buffett, but in the small to mid-cap space… in which case you want to look for companies that are easy to understand with a durable competitive advantage and a consistent operating history that are selling at a discount to their intrinsic value.

  3. avatar Jerri says:

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  4. avatar Rob says:

    I treat a large cap like a mature Buffett does Coke. For example, Abbott and Microsoft are money generating machine sthat will perpetually spit out dollars. The market has compressed things to a healthy, yet historically low P/E, higher and safe Price/Dividend, coupled with growth in earnings and future dividend yield. Often 10% up to 15% weighting

    I treat a small/mid cap like a young Buffett. Cigar butt, balance sheet , margin of safety Class 101 investing… Find the value, hold, and sell in stages reducing my overall cost. Seek 50% total return. Sometimes I regret, but more often my time to sell was correct and mistakes balance out. Weighting anywhere from 1% to 3%. Currently looking at Diana Shipping among others.

    I’ve beat the market over the last decade with patience and adherence to Rules #1 (Don’t lose money) and Rules #2 (Don’t forget Rule #1).

    It’s sixth grade math with adult reasoning… even a caveman could do it.

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