Time and again I see articles explaining how to pick stocks like the Oracle of Omaha. Most of the time the advice is along the lines of, ‘look for stocks on low PE multiples that throw off cash and have high payout ratios’. This research paper , for example, claims that a combination of moderate leverage and boring stable stocks is all you need to explain Buffett’s track record. I beg to differ.
I’ve been reading Buffett – The Making of an American Capitalist by Roger Lowenstein. One thing that stands out to me is how often Buffett took over a struggling business early in his career and turned it around. In one case, he made a potentially disastrous investment in the Buffalo Evening News. His investment provoked a bitter rivalry with the other Buffalo paper, the Courier-Express. Buffalo couldn’t support two papers, and Buffett’s investment was hemorrhaging cash. In the end, it was Buffett’s deep pockets, his rigorous management style and strong stand against the newspaper unions that helped the Evening News prevail, forcing the Courier to fold. It was only after he gained a monopoly in Buffalo that his investment paid off. By the eighties, the paper was earning $40million per year due to a lack of competition.
The point of this story is that, time and again, Buffett found companies that were in deep trouble – Berkshire Hathaway, the Buffalo News, Wesco, etc – and turned them into gold mines. An analogy would be buying a house and renovating it so that it brings in a much higher rent, as opposed to simply buying a house and waiting for it to appreciate. Most of us could try our hand at renovating a house, but renovating a company is beyond our reach.
None of this is meant to belittle Buffett’s stock picking ability, which is clearly second to none. However, he has a unique combination of stock picking ability and brilliant, ruthless management skills which none of us will be able to emulate, no matter how many Berkshire newsletters we read.