To see Part 1 of Warren Buffett’s investment strategy, click here.
Second Stage – Growth (1972 – 1989) (age 42 – 59)
- It’s in this stage that Buffett discards Graham’s value investing and “evolves”.
- In 1969, Buffett read Fisher’s book about investing not in undervalued companies, but in growth companies.
- Basic concept: instead of before where we bought an undervalued company (e.g. 60 cents on the dollar) and spent a lot of time to fix it up, now you should buy a “growth” stock that’s overvalued, but this is good because the company’s good management ensures it will grow in the future, which means you spend less time focusing on the company.
- This strategy was especially suited for the time (1970s and 80s), because there were no undervalued stocks left and it was the great age of growth stocks: Nifty Fifty e.g. McDonalds, Nike, Coca-Cola, etc.
The first example of Buffett truly applying the growth stock idea is when he bought Sees Candy Comapny in 1972. He knew that the price he payed for the whole company was overvalued, but because it had great growth prospects, he was getting a great deal in the long run (even though he was paying more than necessary). To quote Buffett’s own words
- I am now more willing to pay more money for a good company and good management than I was 20 years ago, when the only thing I looked at was statistics
In other words, Buffett in the Second Stage is looking more for the intangible things (e.g. strong management), where as in the past he was looking at tangible things (e.g. financial statement, cash in the bank, assets).
In this stage, Buffett’s investments can be categorized:
- 100% acquisation of great businesses that the good management could run themselves. Buffett just needs to cash in the profits that these companies make.
- Long term shares in big corporations that have strong management and growth opportunities e.g. Coca-Cola, GEICO, Washington Post.
- Significantly scaled down Undervalued Investments (as these opportunities were rare).
- Significantly scaled down Arbitrage (as these opportunities were fewer).
- Buy insurance companies – these are like cash cows, generating a steady flow of cash that can be used towards purchasing other great companies. Having cash is so important, because in times of economic crisis, you have the enough money (while no one else does) to snap up companies at bargain prices.