Warren Buffett announced that he will no longer write Berkshire Hathawayin the annual report, much attention has recently been paid to its incredible long-term achievements. This is truly astonishing – since the mid-1960s, it has generated returns of around 20% per year for its investors.

That’s almost double the annual return S&P500 during this time and significantly higher than the returns achieved by most other investment managers in recent decades. The question arises – how did he do it?

Focus on quality and mixing

I spent a lot of time studying Buffett’s investing strategy. In my opinion, there are three key things that the investing guru did differently than most other investors.

First, it focuses on high-quality businesses. Initially, he was a value investor, looking for extremely affordable “cigar butt” companies that no one else wanted to invest in. However, over time, he turned to a “quality” approach – companies with dominant market positions, wide economic moats, sturdy balance sheets and high levels of profitability.

As part of this quality strategy, he looked for companies that could consistently generate a high return on equity (ROE) and continually reinvest their profits for future growth.

This is “assembly 101.” If a company is highly profitable and can consistently reinvest a immense portion of its profits, it is likely to be much more profitable in the long run.

“The primary test of management’s economic performance is achieving a high rate of return on equity capital employed, not achieving consistent earnings per share growth.”
Warren Buffett in the 1970s

He held the stock for decades

This brings me to my next observation. Buffett often held stocks for decades, allowing the underlying companies to significantly raise their profits.

A great example is here Coca-Cola (NYSE:KO). He first invested in a beverage company in 1988.

It is a high-quality company with a sturdy brand and a dominant position on the market. It is also very profitable – over the last five years its ROE has averaged 43%.

Add to this high ROE and Buffett’s investment horizon of several decades, and we get spectacular results. I calculate that Buffett made over 20 times his money on these stocks, not counting dividends!

An unconventional approach to portfolio construction

However, I must mention one more thing, which is that Buffett has always had an unusual approach to portfolio construction. In miniature, he wasn’t afraid to do it huge positions in certain stocks.

We see this today with Coca-Cola. It currently makes up about 9% of his portfolio.

Ultimately, he managed to beat the winners in the long run. Instead of selling when the stock price doubles or triples, he holds on, hoping to make large profits.

Most investors don’t or can’t do this. For example, compliance departments at investment management firms generally do not allow fund managers to take immense positions in individual stocks (this is one reason why many managers underperform).

I’m not saying that investors should consider rushing into Coca-Cola stock today. They look a little steep at the moment, and consumer spending also comes with some risk.

However, by following Buffett’s approach, investors can significantly improve their long-term returns.