Warren Buffett’s investing approach: moats, owners and patience

Warren Buffett is the best-known investor of the past half-century, mostly for one reason: the long record of Berkshire Hathaway, the failing New England textile company he took control of in 1965 and turned into one of the largest US companies. Berkshire's annual reports compare its per-share market value with the S&P 500 every year. Over 1965 to 2024, the 2024 report shows a compounded gain of 19.9% a year for Berkshire against 10.4% for the index with dividends.

His method is unusually well documented, because he has explained it for decades in Berkshire's shareholder letters, written in plain English and published free online. This article describes the main ideas, how they evolved from his teacher Benjamin Graham, how Berkshire is built to use them, and what Berkshire's B shares have done against a simple index fund since they were issued in 1996, including the decade it lagged. It is a description of an approach, not a recommendation to buy Berkshire or any stock.

From Graham's student to Berkshire

Buffett was born in Omaha, Nebraska, in 1930 and was buying stocks as a child. After reading Graham's The Intelligent Investor he enrolled at Columbia Business School, where Graham taught, and later worked for Graham's investment firm, Graham-Newman, in the mid-1950s. In 1956 he started his own investment partnerships in Omaha, which he ran until 1969.

Through the partnerships he bought control of Berkshire Hathaway in 1965. The textile business kept shrinking, but Berkshire became the vehicle for everything else: in 1967 it bought National Indemnity, an insurance company, and over the following decades it acquired whole businesses such as See's Candies, GEICO, BNSF Railway and many others, while also holding large stakes in public companies. In May 2025 Berkshire announced that Greg Abel would succeed Buffett as chief executive on January 1, 2026, with Buffett remaining chairman of the board. Charlie Munger, his partner and vice chairman for decades, died in 2023.

The core ideas

Buy businesses, not tickers

Buffett's starting point, taken from Graham, is that a share is a fractional ownership of a business (see What is a stock? A complete beginner’s guide to shares). The question is never "will this stock go up?" but "what is this business worth, and what am I paying for my piece of it?" Price movements matter only because they occasionally offer the chance to buy below value or sell above it.

Mr. Market and the margin of safety

Two more Graham ideas run through every Buffett letter. Mr. Market is Graham's allegory of a business partner who offers to buy or sell your share every day at prices that swing with his mood. You are free to ignore him, and you should use him only when his price is attractive. The margin of safety is the gap between the value you estimate and the price you pay, which protects you when the estimate is wrong. Both ideas are covered in more depth in Benjamin Graham and value investing: margin of safety explained.

Wonderful businesses at fair prices

Graham bought statistically cheap stocks, often mediocre businesses at very low prices. Buffett did that early on too. Over time, under the influence of Charlie Munger and the writings of Philip Fisher, he moved toward buying excellent businesses at sensible prices rather than poor businesses at bargain prices. The 1972 purchase of See's Candies for $25 million, more than three times its book value, was an early example. See's needed little new capital and could raise prices year after year, so it produced cash that Berkshire used elsewhere for decades.

The quality he looks for is a durable competitive advantage, which he calls an economic moat: a brand, a low-cost position, a network or a regulatory position that keeps competitors from eroding high returns on capital. A company with a wide moat can earn a high return on equity for a long time without needing much debt.

Circle of competence

Buffett insists on investing only in businesses he understands well enough to estimate their long-term economics. The size of the circle matters less than knowing where its edge is. For many years this kept him out of most technology stocks, which cost Berkshire some large gains but also kept it out of the The dot-com bubble: the 1995–2002 boom and the 78% Nasdaq fall. Berkshire's later large position in Apple, built from 2016, was framed as an investment in a consumer-products franchise rather than a technology bet.

Owner earnings

To value a business, Buffett focuses on the cash an owner could take out of it. In his 1986 letter he defined owner earnings as reported earnings plus depreciation, amortization and other non-cash charges, minus the capital spending the business needs to maintain its competitive position and volume. It is close to what analysts now call free cash flow, with an explicit judgment about how much investment is truly required. Value is then the cash a business will generate over its life, discounted to today (see discounted cash flow).

Patience and concentration

Buffett's favorite holding period, he has written, is forever. Low turnover keeps trading costs and taxes low and lets compounding work. He is also willing to concentrate: Berkshire's public stock portfolio has often had a handful of holdings making up most of its value. That is the opposite of the broad Diversification: why spreading your investments reduces risk most investors need, and it only makes sense for someone with deep knowledge of each business and the temperament to hold through large declines.

How Berkshire is built to invest

Berkshire is not a fund. It owns operating companies outright, and its insurance businesses collect premiums up front and pay claims later. The money held in between, called float, can be invested. If underwriting is profitable, float is effectively capital that costs less than nothing. Berkshire's float has grown into the hundreds of billions of dollars and has funded much of its investing.

Several other choices support the long-term approach. Berkshire has paid a cash dividend only once, in 1967, retaining earnings to reinvest. It runs subsidiaries with very little central staff, leaving managers in place. It keeps large cash reserves so it can act during crises, when others are forced to sell. And, particularly since a 2018 policy change, it has repurchased its own shares when it judged them to be below intrinsic value (see Stock buybacks: how share repurchases work and what they do).

BRK-B versus SPY since 1996: what the data show

Berkshire's Class B shares were created in May 1996 and split 50-for-1 in 2010. Because Berkshire pays no dividend, its share price is its total return. The fair comparison is therefore SPY, the S&P 500 ETF, with its dividends reinvested.

From the end of June 1996 to October 2026, $10,000 in BRK-B grew to about $262,000, a compounded return of about 11.3% a year. The same amount in SPY with dividends reinvested grew to about $193,000, about 10.2% a year. Over thirty years, a one-point annual edge produced about a third more money.

The path matters as much as the total. In the late 1990s Buffett avoided technology stocks, and BRK-B fell from $52.26 at the end of June 1998 to $28.80 at the end of February 2000, a decline of about 45%, while SPY rose about 21% on price over the same months. Many commentators wrote that Buffett had lost his touch. By the end of 2002, after the bubble burst, BRK-B had recovered to $48.46 while SPY had fallen to $88.23 from $137.44 in February 2000. In the 2008 crisis both fell hard: BRK-B about 46% from its December 2007 month-end high to February 2009, SPY with dividends about 51% from October 2007.

Split by decade, BRK-B beat SPY in the first two (11.4% against 8.2% a year, then 9.1% against 7.3%) and trailed in the third, 13.2% against 15.4% a year from June 2016 to June 2026, a period when the largest technology companies drove much of the index's return. Buffett himself has repeatedly told shareholders that Berkshire's size makes large outperformance much harder than it once was: there are few acquisitions big enough to move the results of a company Berkshire's size.

What ordinary investors can take from Buffett

Some of Buffett's methods are hard to copy. Most investors have no insurance float, cannot buy whole companies, and lack the time and training to value businesses well. Concentration without his skill is simply risk. What transfers well are the habits:

• Think like an owner. Ask what a business earns and what you are paying, not where the price went last week.
• Know your limits. Stay within what you understand; saying "I don't know" is allowed.
• Let time work. Low turnover reduces costs and taxes and keeps behavior out of the way, a lesson reinforced by Overconfidence and overtrading: the research on trading too much.
• Use volatility, don't obey it. Market declines are when long-term buyers get better prices, provided they have cash and nerve.

Perhaps the most practical lesson is one Buffett has stated directly. In his 2013 letter he described instructions for the trustee of a bequest to his wife: put 10% in short-term government bonds and 90% in a very low-cost S&P 500 index fund. In 2007 he made a ten-year, $1 million charity bet that an S&P 500 index fund would beat a selection of hedge-fund portfolios chosen by a professional manager. His 2017 letter reported the result: the index fund compounded at roughly 7% a year, the selected funds of hedge funds at about 2%. See Index investing: passive vs. active funds and what the data shows and John Bogle and index investing: the cost matters hypothesis.

How Finabase helps

The BRK-B symbol page shows Berkshire's quote, financials, valuation history and the institutional and fund holders of the stock. Its comparison tab (BRK-B against SPY) charts the two together over periods you choose. To practice Buffett-style questions on any company, the Valuation tab (for example Coca-Cola's) shows up to ten fiscal years of valuation multiples, profitability and growth, and the Financials tab has the income statement, balance sheet and cash flow needed to estimate owner earnings.

Frequently asked questions

What is Warren Buffett's investment strategy?

Buffett buys businesses he understands, with durable competitive advantages and capable, honest management, at prices that leave a margin of safety, and he holds them for a very long time. He values them by the cash they can return to owners over their lives.

What is an economic moat?

An economic moat is Buffett's term for a durable competitive advantage, such as a strong brand, low costs, network effects or regulatory protection, that lets a company keep earning high returns on capital despite competition.

Has Berkshire Hathaway beaten the S&P 500?

Over its full history, by a wide margin: Berkshire's 2024 annual report shows 19.9% a year against 10.4% for the S&P 500 with dividends from 1965 to 2024. Since 1996, BRK-B's lead over SPY in Finabase data is about one percentage point a year, and over the ten years to June 2026 it trailed.

What does Buffett recommend for ordinary investors?

He has repeatedly said that most investors are best served by a low-cost S&P 500 index fund, bought steadily over time. His 2013 letter described a 90% index fund, 10% short-term government bond allocation for his own estate's trustee.

Summary

Buffett's approach starts with Benjamin Graham, treating shares as pieces of businesses, buying below value and ignoring the market's moods, and moved toward buying wonderful businesses with durable moats at fair prices and holding them for decades. Berkshire's structure, with insurance float, retained earnings and owned subsidiaries, was built to support that patience. The record is exceptional over sixty years, more modest since 1996 and behind the index over the latest decade, which Buffett himself attributes largely to size. The parts most investors can use are the habits: think like an owner, stay within your competence, trade rarely and, if you are not going to analyze businesses, own the index.