Warren Buffett's secret sauce: Be a business picker, not a stock picker

Ace investor Warren Buffett believes in picking businesses over stocks and credits this attitude behind Berkshire’s success in creating value for its shareholders.

“Charlie and I are not stock-pickers; we are business-pickers,” Buffett, referred to as Oracle of Omaha, wrote in his letter.

Buffett said that Berkshire has been able to pick businesses that have been lasting value creators. He highlighted Berkshire’s purchase of Coca Cola in 1994 at the cost of $1.3 billion which now has grown to a value of $25 billion excluding yearly dividends. Another purchase that Buffett highlighted was that of American Express in 1995 at the same cost as Coca Cola which now has a value of $22 billion excluding dividends.

That said, not all businesses that Berkshire picked have been successes. Buffett, however, pointed out that the value creators are more than enough to make up for mistakes. For instance, if any business with the same cost as Coke or Amex had flatlined, it would have been an insignificant part of Berkshire’s portfolio today. “The weeds wither away in significance as the flowers bloom. Over time, it takes just a few winners to work wonders,” Buffett wrote.

Buffett drove home the point that picking businesses has risks and costly mistakes should be expected. But the few that deliver returns make up for the losses in more ways than one.

Of course, it should be noted that Buffett and his partner Charlie Munger (vice chairman of Berkshire) are both more than 90 years old. The concept of compounding has worked given the early start and the long runway in terms of time for them.

Short term swings

Berkshire Hathaway reported a quarter on quarter fall in its Operating earnings for Q4. Earnings for the quarter were $6.7 billion compared with $7.8 billion in the previous quarter. But for the full year of 2022, Berkshire’s operating earnings stood at $30.8 billion. This is excluding capital gains on stocks held. Buffett termed quarterly earnings misleading given the outsized capital gains the company is sitting on. One such investment that Buffett flagged was Alleghany Corporation, a Property casualty insurer. Berkshire’s insurance float has increased to $164 billion post this investment. “Though not recognized in our financial statements, this float has been an extraordinary asset for Berkshire,” Buffett wrote in his letter.