In his chairman’s letter to Berkshire Hathaway shareholders this year, the billionaire investor Warren Buffett described his group’s investment portfolio as being like a “forest”.
Berkshire’s many and diverse businesses, he said, were its “economic trees”. Like any portfolio, it has an array of specimens (in Berkshire’s case there are vast numbers of them). They range in size from twigs to redwoods. And while a few trees are diseased and likely to die in the decade ahead, he said, “many others are destined to grow in size and beauty”.
This was Buffett hitting his poetic stride. He took the arboreal theme a step further by splitting the forest into five important “groves”. For Berkshire, the biggest of those groves is obviously insurance, which has powered the portfolio over decades. Others are its non-insurance businesses, equities, joint ventures and then bonds and cash.
Buffett used this analogy because he felt that onlookers often obsess about “mind-numbing” analysis of individual businesses, or trees. His point was that you don’t need to assess every single tree to make “a rough estimate of Berkshire’s intrinsic business value”.
Now to be fair, the read-across for regular investors isn’t all that straightforward. With Buffett’s resources, I’d hazard you could be fairly relaxed about the odd disaster or bad decision. Most of the rest of us quite rightly take those things pretty hard.
But the point still stands that, even though his portfolio is on a far greater scale than most, Buffett’s diversified approach lets him think strategically rather tactically. Taking a 50,000ft view means he can be sanguine when things don’t go right and focus instead on whether the overall campaign is paying off. This is where the lesson is.
Are we thinking strategically enough?
There was an update to some research recently about exactly how investors deploy funds when they’re building up portfolio holdings. The findings are quite subtle - and on the surface you might not think they’re that earth-shattering - but they echo this same idea of thinking from a portfolio perspective.
What the findings show is that, in general, investors (because we’re human) are prone to not thinking strategically enough about our portfolios. One of the causes is well know and I’ll come to that in a second. First of all, let’s look at this research…
Let’s say you had a lump sum to invest in the market to…
