WhitmanTrading

Warren Buffett: The Approach Changed

Warren Buffett's approach is to buy whole businesses or shares in them at a price below what they are worth, and hold for a very long time. He began buying statistically cheap companies and shifted to buying high-quality ones at fair prices, which is the most instructive part of the record.

How it works

A candlestick chart of the site's shared price history. The headline on the chart reads: Buy businesses, not tickers - and hold them.
Buy businesses, not tickers - and hold them. Illustrative chart - not real market data.

The central idea is ownership rather than trading. A share is a fraction of a business, and the question is what the business will earn over decades rather than what the price does next.

A gently rising stretch of the long price series with an account equity curve beneath it. The headline on the chart reads: His approach changed once, and that is the interesting part.
His approach changed once, and that is the interesting part. Illustrative chart - not real market data.

There were two distinct phases. The early one bought companies trading below the value of their assets; the later one bought companies with durable advantages, at reasonable rather than bargain prices.

A calmly advancing stretch of the long price series with a slowly rising equity curve beneath it. The headline on the chart reads: He started buying cheap and ended buying good.
He started buying cheap and ended buying good. Illustrative chart - not real market data.

The shift is the most instructive thing in the record. Statistically cheap companies are frequently cheap for reasons that persist, and the later approach accepts a higher price for a business that keeps earning. A method that changed once is a method somebody tested, which is more than most published approaches can claim.

The filters

A flat, quiet stretch of the long price series with a gradually rising equity curve beneath it. The headline on the chart reads: A durable advantage is what he looks for now.
A durable advantage is what he looks for now. Illustrative chart - not real market data.

The first filter is durability. Something that stops competitors taking the profit away — a brand, a cost advantage, a switching cost, a network. Without it, a good business attracts competition until it is an ordinary one.

A strongly rising stretch of the long price series with an account curve breaching its limit. The headline on the chart reads: And he declines anything he cannot explain.
And he declines anything he cannot explain. Illustrative chart - not real market data.

The second is a boundary around what he understands. Declining an opportunity because it sits outside that boundary is a decision rather than a failure, and it is the discipline most easily copied by anybody.

A choppy, directionless stretch of the long price series. The headline on the chart reads: The holding period is the part nobody copies.
The holding period is the part nobody copies. Illustrative chart - not real market data.

And the holding period is the part that gets left out. Positions held for decades through declines that would have ended most people’s conviction — which is a behavioural achievement rather than an analytical one.

What cannot be copied

A declining stretch of the long price series. The headline on the chart reads: And the insurance float is the part nobody can copy.
And the insurance float is the part nobody can copy. Illustrative chart - not real market data.

Berkshire’s insurance businesses provide capital to invest before claims are paid. That is a structural advantage unavailable to an individual, and it is a genuine part of the record rather than an incidental detail.

A 72-bar candlestick section of the shared price history with an account curve shown with and without fees. The headline on the chart reads: His public advice for everyone else is an index fund.
His public advice for everyone else is an index fund. Illustrative chart - not real market data.

His stated advice for people who are not doing this professionally is a low-cost index fund. Which is worth taking seriously precisely because it comes from somebody who did the other thing successfully.

In practice

A candlestick chart with a volume histogram beneath it, with the volume histogram emphasised. The headline on the chart reads: He has never traded on participation or on price action.
He has never traded on participation or on price action. Illustrative chart - not real market data.

Nothing in the method uses a chart. Volume, patterns and indicators play no part; the inputs are financial statements and judgements about competition.

A long-horizon candlestick view of the same price series. The headline on the chart reads: The record is decades long and it compounded slowly.
The record is decades long and it compounded slowly. Illustrative chart - not real market data.

The compounding is unremarkable annually and extraordinary cumulatively. No year in the record looks like the thing people imagine when they hear the name.

A candlestick series containing several opening gaps, with the largest opening gap marked. The headline on the chart reads: And he bought most willingly during the falls.
And he bought most willingly during the falls. Illustrative chart - not real market data.

A gap down is an opportunity in this framework. The business did not change; the price did, and the whole approach depends on treating those as separate facts.

A declining stretch of the long price series, with the entry price and the level at which a stop would trigger drawn as horizontal lines. The headline on the chart reads: There is no stop in any of it.
There is no stop in any of it. Illustrative chart - not real market data.

No stop appears anywhere. The exit condition is the business deteriorating or the original reasoning being wrong, and neither is a price level.

A candlestick chart of the site's shared price history, annotated with the round-trip cost. The headline on the chart reads: Every trade avoided saves a share of a bar.
Every trade avoided saves a share of a bar. Illustrative chart - not real market data.

Very low turnover removes almost all trading cost. Each avoided round trip saves 2% of a median bar’s range on this site’s shared history, and over decades that accumulates into a real part of the result.

What is actually transferable

Three things transfer to an ordinary investor and one does not. The two filters — durability and understanding — transfer completely and cost nothing. The long holding period transfers if you can manage it. The insurance float does not transfer at all, and any comparison that ignores it is incomplete.

The most honest reading of the record is that it combines a good method with a structural advantage and an unusual temperament. Copying the method without the other two produces something different, which is worth knowing before treating the results as a target rather than as an illustration.

What the approach is not

It is not stock picking by intuition. It is reading accounts.

It is not buying anything cheap. That was the earlier version.

It is not replicable in full. The float is not available to you.

And it is not what he recommends to most people.

When it fails

A sideways, range-bound candlestick series. The headline on the chart reads: In a flat decade he is paid by the businesses, not the market.
In a flat decade he is paid by the businesses, not the market. Illustrative chart - not real market data.

A flat decade is the case the approach handles best, because the return comes from the businesses rather than from the market rerating them — and it is also the decade in which almost nobody sticks with it.

The second failure is copying the holdings without the reasoning. A position bought because somebody else owns it has no exit condition, because you never had an entry condition.

A third is applying it to companies you cannot assess. The boundary is the method’s central discipline and the easiest one to ignore.

A fourth is expecting the returns without the size. The early record was made on a small amount of capital in a less efficient market.

And a fifth is treating patience as passivity. The holding period is the result of conviction that was built beforehand, not of not looking.

The original data

Of the 31,760 trading and investing videos in this site’s corpus, 77 have “warren buffett” in the title at a median of 71,546 views across 54 channels, with a maximum of 4,306,456. “Charlie munger” returns 12 at a median of 307,798, “peter lynch” returns 13 at a median of 10,131, and “howard marks” returns 9 at a median of 178,341. The counts are in research/corpus-coverage.json, produced by site/measure_corpus.py.

A strongly rising stretch of the long price series, cut short at the decision bar. The headline on the chart reads: A great company at a full price. Buy it?
A great company at a full price. Buy it? Illustrative chart - not real market data.

Seventy-seven videos at a median of 71,546 views makes this one of the highest-demand names in the whole corpus, and the answer to that final question is the one his own record actually changed on. The early version said no; the later version said that a fine business at a fair price beats a fair business at a fine price. Reading the shift is worth more than reading either half of it, because it is the only documented case of somebody successful publicly revising their own method.

Value investing is the framework the approach sits inside. Intrinsic value is what the estimate is of. And Charlie Munger is the partner who argued for the change.

What I actually do

What is worth taking from him is not stock picking, it is the two filters. Would I be happy owning this for ten years, and can I explain what it does in a sentence. Almost everything I have got badly wrong failed one of those before I bought it.

— Michael Whitman

This page is educational, not financial advice. Test every idea on your own charts before risking money.