My Lessons Learned From Following Warren Buffett

| About: Berkshire Hathaway (BRK.A)
This article is now exclusive for PRO subscribers.


Here's my lessons learned over 18 years as a shareholder of Berkshire Hathaway.

Warren Buffett taught me great tools for investing my money.

I review Buffett's latest acquisitions and his stock's valuation.

I bought stock in Berkshire Hathaway (NYSE:BRK.B) (NYSE:BRK.A) 18 years ago. Warren Buffett has made me a lot of money. More importantly, he has taught me how to be a better investor.

Living in Nebraska in the 1980s and '90s, I met several people who regretted they had not invested in Berkshire Hathaway. I did not want to become one of them. In 1996, I drained all of our savings and checking accounts to buy four Class B shares of Berkshire Hathaway at a price of $1100 apiece. I told my wife not to spend any money until the next payday in seven days. I remember a colleague at work said buying $4400 worth of stock was a dumb thing to do because it doesn't pay a dividend, I could not drive it nor live in it. As it turns out, my original investment is up 6.8 times, plus I invested more money in Berkshire Hathaway in 2009, 2010 and 2014. Needless to say, the stock has performed extraordinarily well.

I applied Buffett's recommendation to buy companies that have a competitive advantage, a large barrier to entry with good return on capital and minimal debt. Avoid stocks in companies that might be replaced by a new technology.

In the booming technology stock wave of the 1990s, Buffett stayed away from tech stocks because he was afraid their business plans could be wiped out by a future technology. Buffett wrote in 1999:

The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage.

I took to heart what he said in 1999. I sold all my technology stocks, including AOL (NYSE:AOL) and Motorola (NYSE:MSI). I bought candy and cola stocks, railroads and consumer household stocks. I was spared by the tech slaughter of 2000-01, because I followed Buffett. Back then I had a large and growing position in Wrigley that was later purchased by Mars. I acquired shares in Hershey (NYSE:HSY), PepsiCo (NYSE:PEP) and Union Pacific (NYSE:UNP). Each have "durability advantage." All three own significant market share in their industry; they have long histories of raising dividends and there is a barrier to entry, especially with railroads.

Buffett strayed from his aversion to tech in 2011 when he invested $11 billion in IBM (NYSE:IBM). Buffett was impressed with its five-year business plan at the time. He also liked its history of raising dividends. Yet IBM has been a big loser for Buffett. He has lost over $1 billion in paper profits in the company.

In his early days, Buffett avoided overseas' investments and instead invested in U.S. companies that operated in other countries. That investment style changed in the past 10-12 years and perhaps contributed to some mistakes. The biggest mistake was Tesco (NASDAQ:TESO), the U.K. supermarket chain.

Berkshire Hathaway recorded a $678 million loss on the Tesco sale in the third quarter. Berkshire was Tesco's fourth-largest investor until recently selling down its stake amid plunging profits and an accounting scandal at the U.K. supermarket chain. Buffett called the investment "a huge mistake."

When Buffett bought Duracell, the deal brought back memories of his cigar butt deals from his early days. He picked up Duracell cheap without tax impact. Using Procter & Gamble (NYSE:PG) stock, he bought Duracell at approximately 7-times fiscal year 2014 adjusted EBITDA. This equates to a cash sale valued at approximately 9-times adjusted EBITDA. Plus P&G said it expects to contribute approximately $1.8 billion in cash to the Duracell Company in the pre-transaction recapitalization. The deal won't move the needle for Berkshire Hathaway, but will contribute to Berkshire's cash hoard on a steady basis, bringing cash in daily rather than quarterly from the P&G stock dividends. Battery sales are here to stay, although declining a bit, you can't recharge everything, proprietary batteries are more expensive to replace, that's why all my cameras use Double AA batteries, I can find these anywhere. Duracell makes them.

Buffett can do deals that no one else can do just because he is Buffett. In the financial crisis, he provided a $3 billion loan to General Electric (NYSE:GE) that paid a 10% dividend, but investors like me who bought GE stock didn't fare so well. I took a loss of -$1,000 when I sold my GE stock.

I followed Buffett on his investment in railroads in the mid 2000s. I had covered railroads as a reporter and saw their growing business. Buffett bought stock in every Class I railroad including BNSF Railway and Union Pacific. Buffett later bought BNSF Railway outright and had to sell his other rail stocks. My rail stocks have outperformed the S&P 500 every year since 2009.

Buffett has made a few mistakes, but his successful investments have more than made up for his mistakes and then some. I love his honesty about his mistakes. In my 20 years of investing and following Buffett, my mistakes were about 10% to 20% of my stocks, but because I was diversified, I didn't lose much from a bad stock relative to my whole portfolio. In 2008, Buffett said:

Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors.

Unafraid, I went in deep -- meaning I spent a ton of money -- when I had conviction buys with railroads and utilities in 2009 and 2010.

Buffett's No. 1 rule for investing "is never lose money. Rule No. 2 is never forget rule number one."

That rule made me a conservative investor. I stay away from biotech and tech startups because I don't understand them, I've been burned by biotech, I don't want the risk of losing money. I want to own a company that will almost assuredly continue making money no matter how the economy is doing.

I have an aversion to investing in other countries. I own over 20 stocks. Only two are foreign: Canadian Pacific Railway (NYSE:CP) and Canadian National Railway (NYSE:CNI). The U.S. economy is producing more jobs than in Japan or Europe. U.S. GDP grew 3.5% in the third quarter. Job growth was 321,000 in November. U.S. equities are the place to be in 2015.

Influenced by Buffett, my conservative nature has made me seek stocks with more of a sure thing than the irrational greedy high-risk play. My utility stocks like Dominion Energy (NYSE:D) and Westar Energy (NYSE:WR) have done very well. I started buying Dominion in 2008-09 at $33 per share and bought more at $67 per share this year. I picked up a few shares of Westar Energy at $36.10 per share in early 2014.

I also follow Buffett's aversion to investing in commodities like gold or corn. It's better to own companies like Hershey that use commodities to make a profit.

Berkshire Hathaway is now trading at 1.56 times book value, a record. The last time I saw this company trade at 1.5 times book was at the top of the stock market in 2007. I didn't sell then and I'm not selling now.


I know Buffett will not be around forever. There will never be another Buffett. Yet Buffett has a great succession plan. His top managers have worked for Buffett for several years and have learned his tools of the trade. This will help them run the company after he is gone. The 80 companies that he has acquired over the years are good businesses that will continue to earn a fair return for many years to come. That is why I am holding onto Berkshire Hathaway.

Disclosure: The author is long BRK.B, UNP, HSY, PEP, CP, CNI.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.