- Larry Swedroe said Buffett’s success is down to value investing and quality stocks
- Buffett’s company Berkshire Hathaway regularly outperforms the S&P 500
- The author said index funds can help investors to mimic Buffett’s performance
A top financial researcher has revealed what he believes is the ‘secret sauce’ to the success of legendary investor Warren Buffett – and it is not just stock picking.
Known as the ‘Oracle of Omaha,’ Buffett – who is worth $130.7 billion – is one of the best-known investors of all time.
The 93-year-old runs Berkshire Hathaway, which owns dozens of companies, including insurer Geico, battery maker Duracell and restaurant chain Dairy Queen.
Buffett is renowned for his ability to pick companies which provide a good return over many years – and Berkshire Hathaway regularly outperforms the S&P 500.
But researcher and author Larry Swedroe said that while Buffett is generally considered the greatest stock picker of all time, ‘he really was not a great stock picker at all.’
‘What Warren Buffett’s ‘secret sauce’ was, he figured out 50, 60 years before all the academics what these factors were that allowed you to earn excess returns,’ Swedroe said in an interview with CNBC.
Swedroe, who is the author and co-author of almost 20 books on financial and economic research, was referencing a chapter on the investor’s ‘secret’ in his new book ‘Enrich Your Future – The Keys to Successful Investing.’
The book claims that Buffett’s ‘secret’ is down to a variety of factors.
One is the cheap leverage which is provided by the insurance operations at Berkshire Hathaway, and another is that he is a value investor.
Swedroe said Buffett’s success is down to his focus on value investing and quality stocks
Value investing typically refers to buying underappreciated stocks or businesses which are being sold at a discount – and holding them for the long term.
‘What gives you opportunities is other people doing dumb things,’ Buffett said of the strategy in an annual shareholder’s meeting last year.
Swedroe also cites that his style focuses on quality, cheap and large stocks.
‘Warren Buffet’s favorite factor would be quality which includes profitability, but also looks at things like financial strength, stability of earnings and limited debt,’ he told CNBC.
He said index funds can help investors trying to mimic Buffett’s performance.
Index funds track the performance of a specific market benchmark or index – like the S&P 500 – as closely as possible. They offer low-cost, broad diversification.
‘Now today, every investor can own through ETFs or mutual funds the same types of stocks that Buffett has bought,’ he said.
With a mutual fund, you can buy and sell based on dollars, whereas with an ETF (exchange-traded fund) you buy and sell based on market price.
Known as the ‘Oracle of Omaha,’ Buffett – who is worth $130.7 billion – is one of the best-known investors of all time
Buffett’s company Berkshire Hathaway regularly outperforms the S&P 500
Swedroe, who is also the head of economic and financial research at Buckingham Wealth Partners, added investors can also benefit from momentum trading – which is a strategy that seeks to capitalize on momentum to enter a trend as it is picking up steam.
He said individual stock picking and market timing – trying to go in and out of the market – do not always explain long-term performance in the stock market.
‘Momentum certainly is a factor that has worked over the long term, although it does go through some long periods like everything else will underperform. But momentum does work,’ he said.
In the past five years, Berkshire Hathaway’s stock has outperformed the S&P 500 by 25 percent, rising 107 percent versus an 82 percent gain in the S&P 500.