190 THE WARREN BUFFETT WAY
mouths. Even now, with so many money managers unable to add value
to client portfolios, it is easy to understand why passive investing has
gained popularity.
Throughout the past few decades, investors have f lirted with many
different investment approaches. Periodically, small capitalization, large
capitalization, growth, value, momentum, thematic, and sector rotation
have proven f inancially rewarding. At other times, these approaches have
stranded their followers in periods of mediocrity. Buffett, the exception,
has not suffered periods of mediocrity. His investment performance,
widely documented, has been consistently superior. As investors and
speculators alike have been distracted by esoteric approaches to investing,
Buffett has quietly amassed a multi-billion-dollar fortune. Throughout,
businesses have been his tools, common sense his philosophy.
How did he do it?
Given the documented success of Buffett’s performance coupled
with the simplicity of his methodology, the more appropriate question
is, why don’t other investors apply his approach? The answer may lie in
how people think about investing.
When Buffett invests, he sees a business. Most investors see only a
stock price. They spend far too much time and effort watching, predict-
ing, and anticipating price changes and far too little time understanding
the business they are part owner of. Elementary as this may be, it is the
root that distinguishes Buffett.
While other professional investors are busy studying capital asset
pricing models, beta, and modern portfolio theory, Buffett studies
income statements, capital reinvestment requirements, and the cash-
generating capabilities of his companies. His hands-on experience with
Stocks are simple. All you do is buy shares in a great business
for less than the business is intrinsically worth, with manage-
ment of the highest integrity and ability. Then you own those
shares forever.^2
WARRENBUFFETT, 1990