Warren Buffet's Investment Philosophies

Buffett believes, "investing behaviour should be driven by information and analysis" (Bruner et al. 2010). This implies that Buffett is able to make long run above average returns on the market by using public information and past trading data. Barry (2008, 10) espouses that “information does not get transmitted quickly into stock prices.” This notion rejects the hypothesis that markets are semi-strong form efficient. However, we believe that Buffett has access to private information due to his purchasing power and his history in acquiring whole companies. Therefore, this represents the argument that he has access to information which may not be publicly available. If this is the case, one can conclude that markets are semi-strong form efficient as Buffett is able to derive consistent above average returns on the market due to the fact that he has access to private information (Rozeff and Zaman 1988). The semi-strong form efficient market hypothesis implicitly implies that to make above average returns on the market, you need to have access to public information (Fama 1969).

Buffett has eight specific investment philosophies, some of which directly contradict conventional investment theories. Of particular note are Buffett’s views on diversification and his ideas regarding risk and discount rates.

Traditional portfolio theory holds that diversification will lower the idiosyncratic risk of a given portfolio (Pinder et al. 2009). Empirical studies by Michaud and Schroeder (2009) found that low cost index tracking funds had lower portfolio risk and hence raise long term expected return.

Buffett is strongly opposed to diversification and believes in investing in a manner that has a return equal to the market and that an investor should concentrate on a small number of industries that they know well and understand (Hagstrom 1999).

Another contradicting philosophy is Buffett’s use of the risk-free rate when discounting predicted future cash flows. Traditionally,...