Sunday, December 1, 2019

Investing Styles of Warren Buffett and Bill Miller

Investing styles of various prominent investors and funds take into account a wide range of factors. Their popularity in terms of attention from the investment community directly correlates with their success rates. The measurement of the success rate implies the comparison portfolio performance against the respective market. Warren Buffett and Bill Miller are amongst the most prominent figures in the investment industry because of their historically confirmed ability to outperform the market on a consistent basis. Therefore, there is sufficient evidence to compare and contract investment styles and approaches of Warren Buffett and Bill Miller. Furthermore, it will be possible to determine the main factors contributing to the success rates of the respective approaches.

Warren Buffet has been an active investor and the Chief Executive Officer (CEO) of Berkshire Hathaway Inc. The company has been active in acquiring other firms through its subsidiaries. The markets have been demonstrating primarily positive reaction to acquisitions through increases of the company’s share price (Bruner and Carr). Warren Buffett remains amongst the richest individuals in the world, while serving as a CEO of Berkshire Hathaway Inc. The company has been paying its CEO $100 000 per annum, while he and the other insiders were holding 41.8 percent of the company as of May 2005. In addition, Mr. Buffet has stated that he was keeping 99.0 percent of his personal wealth with the company. The mix of the limited compensation for the position of the CEO and personal interest in success of Berkshire Hathaway Inc., were contributing to the investment attractiveness of the company for the other investors. Warren Buffett was pursuing an investment style of value investing, while acknowledging the effectiveness of the other approaches. Acquisition of PacifiCorp by the subsidiary of Berkshire Hathaway, MidAmerican Energy Holdings Company, was reflecting the approaches of Mr. Buffett towards investments, valuation, and long-term vision.

Buffett and his partners acquired Berkshire Hathaway in 1965, following its decline because of the rising inflation and the rising levels of competition (Bruner and Carr). The company has been acquiring other companies, while exiting its core industry, textile, in 1985. Share price of the firm has increased from $102 per share in 1977 to $85 500 in 2005 versus $96 to $1 194 in 1977 to 2005 for S&P 500 respectively. The portfolio of the company included businesses from several industries, namely insurance, apparel, building products, financial products, finance, retail, flight services, grocery distribution, as well as carpet and floor coverings. Berkshire Hathaway has also been investing in major large publicly traded firms. The company began trading foreign exchange contracts in 2002 as a response to the growing current account deficits of the United States. Warren Buffett has developed the foundation for his investment approach at Columbia University by identifying undervalued stocks that were demonstrating the higher intrinsic value relative to their price. Mr. Buffet has been publishing annual letters to the shareholders, including several essential concepts, including focus on economic versus accounting reality, the cost of the lost opportunity, value creation, performance measure focusing on intrinsic value, rather than accounting profit, risk and discount rates, diversification, investing behavior, as well as alignment of agents and owners. The focus on economic reality implied prevalence of cash flows and fundamental analysis over accounting profits and other related figures. The cost of lost opportunity required assessment of various investment projects in the market. Value creation was reflecting the time value of money concept, implying the need to account for the potential of capital to generate return over time. Thus, book value was reflecting historical input, while intrinsic value was demonstrating future output. Warren Buffett was utilizing risk-free rate for discount the future cash flows within the framework of capital asset pricing model (CAPM). Such an approach was possible through avoidance of debt in the capital structure of the company. Diversification was a part of risk minimization approach. Behavioral finance implied focus on the long-term growth and patience regarding the achievement of the expected results by the projects. The alignment of agents and owners implied personal interest of Warren Buffett in Berkshire Hathaway. The acquisition of PacifiCorp by MidAmerican was following the year of high liquidity level of Berkshire Hathaway. Mr. Buffet has recognized long-term growth potential of PacifiCorp in terms of its future returns and undervalued position in the market. Warren Buffett would invest in Coca-Cola Company (Coca-Cola) as a part of his portfolio. The main reasons for such an investment would include historical long-term growth of the company, minimum investment required in innovations, as well as its potentially undervalued positon in the market (Yahoo Finance). The company has reported decline in revenues in the most recent reporting period, while its price to earnings ratio remained at 28.82 percent, which is below its 5-year average. The company represents a value stock, which fits the investment style of Warren Buffett.

Bill Miller was managing Value Trust in 2005 with the total value of $11.2 billion (Carr). Similar to Warren Buffett, Miller was able to outperform S&P500 on a consistent basis. Furthermore, he has set a record of 14 years in a row of the superior results for the fund versus the market. Value trust was able to achieve an average annual return of 14.6 percent during the 15 years preceding 2005, while S&P500 has demonstrated 3.67 percent per annum during the same period. Investment approach of Bill Miller was different from the conventional approaches utilized by the other investors. In addition, it is vital to note that the other funds and investors were able to achieve the higher results in the short-term, while Miller’s results were superior in the long term. Mutual funds were common in the U.S. in the beginning of 2000s, as they were providing diversification, expertise, and efficiency to the investors. Investment in mutual funds implied proportional ownership relative to the number of shares acquired. Net asset value (NAV) is the fund’s share value. Annual total return is amongst the main indicators utilized for measuring the performance of a specific fund. Expense ratio reflects the amount of annual payments charged to the shareholders of a particular fund. Similar to Warren Buffett, Bill Miller was focusing on value investing as the primary approach. However, unlike Mr. Buffett, Bill Miller was also incorporating the elements of growth strategy into his approach. Bill Miller was commonly utilizing optimistic growth figures for his valuations, while Warrant Buffett was relying on risk-free rate as the discount rate. These approaches were providing essential information regarding the undervalued business in the market. Both investors were assessing the underlying companies behind the stocks, while avoiding investments without full understanding of their nature. However, Bill Murray was willing to allocate capital with novelty firms, such as Google, while Buffet was avoiding technology firms. Murray was claiming that any stock could be value stock, provided its undervalued position. Bill Murray would invest in the shares of Tesla. Tesla has characteristics of growth stock, with a strong potential to generate the long-term value. The company has become profitable in the two most recent quarters (Morningstar, Inc.). The combination of the growing market share of the firm, as well as environmental protection policies in the developed markets resulting in rising markets for electric vehicles, imply substantial growth potential of Tesla. Tesla operates in auto industry with the significant focus on technological component. The company is in line with the investment approach mixing value and growth stocks in the undervalued positions by Bill Murray.

Warren Buffett and Bill Murray were successful in their investment styles by outperforming the market on a consistent basis. Warren Buffet was utilizing solely value-based strategy with the long-term investment horizon and careful selection of stocks. Mr. Buffet was applying risk-free rate as the discount rate in his valuation process. Bill Murray was utilizing a mix of value-based and growth-based strategies. He was focusing on optimistic growth forecasts for the selected firms. The difference in his approach included focus on the companies in the technology sector, as well as the potential selection of the growth, rather than value stocks. Consistency in performance over time and superiority of the approaches relative to the market were the underlying characteristics of the investment styles developed by Warren Buffett and Bill Murray.

Works Cited
Bruner, Robert F. and Sean D. Carr. Warren E. Buffett. Case Study. Charlottesville: University of Virginia Darden School Foundation, 2005. Print.
Carr, Sean D. Bill Miller and Value Trust. Case Study. Charlottesville: University of Virginia Darden School Foundation, 2005. Print.
Morningstar, Inc. Tesla Inc. 2019. 17 February 2019. .
Yahoo Finance. The Coca-Cola Company (KO). 2019. 17 February 2019.