The Road to the Oracle of Omaha: The Evolution of Buffett's Investment Philosophy —— Part 2

Since entering the 1990s, Buffett has faced a dilemma: too much money and too few opportunities. Facing this challenge, with Buffett's continuous learning and the power of compounding, his investment philosophy has evolved to a higher level, and his investment skills have become more comprehensive and refined.

The evolution of Buffett's investment philosophy in this stage is reflected in the following aspects:

1. Introduction of the "Moat" Concept

This marks the maturation of Buffett's art in evaluating a company's long-term competitive advantage and intrinsic value. In 1993, Buffett first introduced the concept of "moat" in his letter to shareholders. He said: "In recent years, Coca-Cola and Gillette razors have actually increased their global market share. Their brand power, product characteristics, and sales strength give them a huge competitive advantage, forming a moat around their economic fortress. In contrast, ordinary companies struggle without such protection. As Peter Lynch said, stocks of companies selling similar products should be labeled: 'Competition is harmful to health.'"

On May 1, 1995, at Berkshire's annual meeting, Buffett carefully described the concept of "moat": "A wonderful castle surrounded by a deep, dangerous moat. The castle's owner is an honest and elegant person. The castle's main source of strength is the owner's genius brain; the moat permanently acts as an obstacle to enemies trying to attack the castle; the owner inside the castle produces gold, but doesn't keep it all for himself. Roughly translated, we like large companies with dominant positions, whose franchises are difficult to replicate, with great or even permanent ongoing operational capabilities."

At the 2000 shareholders' meeting, Buffett further explained, "We use the 'moat', its ability to widen, and its invulnerability as the main criteria for judging a great company. And we tell the company's management that we hope the company's moat can continue to widen every year. This doesn't necessarily mean that the company's profits have to increase year by year, because sometimes that's not possible. However, if the company's 'moat' continues to widen every year, this company will operate very well."

2. Shift in Investment Strategy

One change: "Due to Berkshire's rapidly expanding assets and the dramatic shrinkage of investment space that would significantly affect our performance, we must make smart decisions. Therefore, we have adopted a strategy that requires only a few smart - rather than overly smart - decisions. In fact, one good idea a year is enough for us." This means Buffett has adopted a more concentrated stock holding strategy.

Another change: As the volume of capital grows larger, Buffett's common stock investments have become more focused on finding undervalued excellent or good large companies in a niche area, implementing a selective contrarian investment strategy. This means paying close attention when a large company with a lasting competitive advantage encounters setbacks and its stock price is depressed by a short-sighted market. This implies that Graham's style of buying cheap goods regardless of essence is no longer suitable for the large-scale Berkshire.

3. Development of the "Swing" Concept

Ted Williams, the American superstar batter, explained his batting technique in his book "The Science of Hitting." He divided the strike zone into 77 cells, each representing a baseball. He would only swing when the ball was in the best cells (the sweet spot), even if this meant risking a strikeout, because balls in the worst positions would significantly reduce his success rate.

Buffett drew an analogy between this strategy and investing, developing the "swing" concept in the investment field. In his 1995 speech to USC Business School students, Buffett briefly described this concept: "In investing, there's no such thing as a called strike. You can stand at the plate, the pitcher can throw a strike; General Motors can be at $47, and if you don't know enough to decide on General Motors at $47, you can let it go right on by and no one's going to call a strike. The only way you can have a strike is to swing and miss."

4. Distinction of Three Types of Businesses

In his 2007 letter to shareholders, Buffett vividly categorized businesses into great, good, and gruesome.

Great businesses: Those with enduring "moats," high returns, and the ability to grow profits without requiring much additional capital, like See's Candies.

Good businesses: Those with enduring competitive advantages and good returns, but requiring substantial capital for growth, like FlightSafety.

Gruesome businesses: Those that grow rapidly, require large amounts of capital to fuel growth, but earn little or no profit, like the airline industry.

Buffett likened these three types of businesses to three types of "savings accounts" - The great account pays an extraordinarily high interest rate that will rise as the years pass. The good account pays an attractive rate of interest that will be earned only if you keep adding funds to the account. The gruesome account is one where you keep adding money, but at an inadequate interest rate.

5. Breakthrough in International Investments and Acquisitions

Buffett's first international investment was in the British alcoholic beverage company Guinness in 1991. His most representative international investment was nearly $500 million in PetroChina in 2003. The most significant international acquisition was the purchase of 80% of Israel's Iscar Metalworking Companies for $4 billion in 2006, which was Buffett's largest investment deal outside the U.S. and the largest foreign investment in Israel's history.

In recent years, Buffett also made very successful international investments in the Korean stock market. He simply browsed through investment manuals provided by investment banks, found financially sound companies with P/E ratios of only 3, selected about 20 stocks to buy, and sold them when they rose five to six times, approaching their intrinsic value.

6. Diversification of Unconventional Investments

Buffett's bulging wallet forced him to make new breakthroughs and developments in unconventional investments.

- In 1991, he invested $300 million in American Express "Percs" stocks through private placement, which paid special dividends for the first three years and could be converted to common stocks before August 1994.

- In 1994-1995, he established derivative contracts for 45.7 million barrels of oil.

- In 1997, he purchased 111.2 million ounces of silver and $4.6 billion in long-term U.S. zero-coupon bonds at amortized book value.

- In 2002, he entered the foreign exchange market for the first time. By the end of 2004, he held a total of $21.4 billion in foreign currency positions across twelve currencies. In the same year, he ventured into the Euro-denominated junk bond market, reaching a total value of $1 billion by 2006.

- Buffett also engaged in fixed-income arbitrage and held other derivative contracts, which can be divided into two main categories: Credit Default Swaps and selling long-term stock index put options.

It's worth noting that abandoning foreign exchange investments and acquiring overseas companies is Buffett's latest investment strategy to avoid holding too many U.S. dollar assets and cash. As Buffett pointed out, Berkshire's main base remains in the U.S., but acquiring high-quality overseas enterprises serves the dual purpose of hedging against further dollar depreciation.

In summary, in his later period, Buffett's thinking has become more open and his techniques more comprehensive. In conventional investment selection techniques, he has become more refined and focused, and has begun to increase the intensity of overseas investments and acquisitions. In unconventional investments, he has become more diverse and aggressive.

Today, various experts and scholars repeatedly summarize Buffett's classic strategies into dogmas, which only shows that the "Oracle of Omaha" continues to progress.