Warren Buffett provided investors with a long list of sage-like advice in his latest annual shareholder letter.
Some of the most successful and revered coaches have something in common: They are OK with taking risks, but not gambles. This is a subtle nuance that can also be applied to investing.
Warren Buffett is one of the most admired investors in history. While the CEO of Berkshire Hathaway (BRK.A -0.34%) (BRK.B -0.01%) has amassed a fortune worth billions, it's how he did it that's more important.
In his most recent annual letter to shareholders, Buffett wrote that the "markets now exhibit far more casino-like behavior than they did when I was young." It's a sobering statement, one that covers views of risk, investment approaches, and age in one simple declarative way.
That's kind of the point. Simplicity has been at the center of Buffett's strategy for decades. With Berkshire holding a record $168 billion of cash and short-term investments on its balance sheet, investors must surely be wondering what Buffett is thinking.
I'd say he just told us, and I think it makes a lot of sense. Let's break down Buffett's investment philosophy and analyze how and why it's become a staple for building generational wealth.
Slow and steady wins the race
Since 1965, shares in Berkshire Hathaway have risen 4,384,748%. Although Buffett is often referred to as the Oracle of Omaha, he is not some sort of prophet or sage who possesses the ability to see the future. Surprisingly, Buffett's investment strategy is quite simple.
Some money managers are attracted to high-growth industries such as technology or genomics, regardless of risk profiles or unproven breakthroughs.
Buffett is the opposite. His portfolio is filled with large, blue chip companies that often carry similar traits: Steady, predictable growth, consistent cash flow generation, and a history of rewarding investors through dividends or share buybacks.
What is Buffett waiting for?
Perhaps the most difficult pillar of Buffett's investment style is his unwavering patience. Berkshire often takes positions in companies and holds on to them for decades. Considering how much a stock can ebb and flow in a given year, this practice is undoubtedly easier said than done.
Given his ability to sit on the sidelines and observe how things play out, it's not all that surprising that Buffett is sitting on such a large cash hoard instead of aggressively deploying it.
Keep in mind that the last few years have been a roller coaster for the macroeconomy. Inflation surged to unusually high levels, causing the Federal Reserve to take action in the form of several interest rate hikes.
While Fed Chairman Powell has alluded to possible rate cuts throughout 2024, this is by no means a guarantee. My suspicion is that Buffett is waiting to see some action from the Fed, and for any election-driven market volatility to subside, before making his next series of moves.
What will Berkshire's next move be?
I wish I knew what Buffett's next move will be, but I don't. And speculating on what companies he may be interested in given his financial horsepower would be irresponsible.
What I can say is that in this euphoric, casino-like market, Buffett is keeping his cards close -- pretty apropos for him. The more important theme here is that through a series of successful investments, Buffett has built a strong balance sheet -- one that gives him a level of flexibility most money managers envy.
Despite the markets trading at record high levels, Buffett is doing what he always does -- avoiding the gamble and waiting patiently, only to emerge with a sweeping chess move when the markets least expect it.
Instead of studying Berkshire's portfolio and trying to identify the next company Buffett may take a stake in, I'd play things differently. Buying shares in Berkshire is a good option for investors who are seeking Buffett-like returns, but also desire some insulated risk.
Moreover, building a position in Berkshire automatically provides exposure to all of Buffett's strategic choices, but in a passive way. Given the rock-solid reputation of Berkshire, coupled with the fund's jaw-dropping long-term returns, I see now as a great opportunity to scoop up some shares -- before Buffett makes his next move.
Adam Spatacco has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool has a disclosure policy.
