Is Warren Buffett a Good Stock Picker?

Warren Buffett is a legend in the investing world, and generations of new investors have studied his portfolio over the years to learn how to choose individual stocks. It may seem odd, then, to ask whether or not Buffett is a good stock picker.

The record, however, shows that Buffett has had plenty of losing stocks alongside his famous winners over his career as an investor.

Is Buffett actually a good stock picker, and what else might account for his lifelong success in the investment world?

Analyzing Buffett’s Losing Stocks

Looking back over Buffett’s career, we can find several instances in which he made investments in companies that didn’t pan out well.

One very prominent example is IBM, in which Buffett invested around $12 billion in the early 2010s. Buffett overestimated the company’s moat, believing that IBM’s large client base at the time would allow it to remain a dominant force in the rapidly changing IT world.

Berkshire eventually sold the stock in 2017 and made a very small profit, though far from what it could have earned over the same period in other stocks.

During the 2020-21 era, Buffett also briefly flirted with buying pharmaceutical companies. In 2020, Berkshire Hathaway spent over $5.5 billion buying shares of Merck, Pfizer, AbbVie and Bristol Myers Squibb.

The investments, however, were made at a time when pharma stocks were trading at elevated valuations. By the following year, Buffett was quickly dumping his pharmaceutical shares

Even more recently, Berkshire’s stake in Paramount turned into a losing proposition. Though the exact numbers haven’t been released, Buffett admitted to shareholders that his company had lost a large sum after selling all of the Paramount shares he began buying in 2022.

Buffett personally took responsibility for the decision and said that the experience had caused him to think more carefully about the changing economics of the entertainment industry.

So What’s the Secret of Buffett’s Success?

Although Buffett still stands out as an above-average stock picker, it’s clear that he’s also had more than his share of losing stocks and bad ideas as well.

The question arises, then, of why Buffett has become the most successful investor in modern history. If the Oracle of Omaha’s stock-picking acumen can’t account for his ability to generate incredible returns, what does?

The answer, interestingly enough, may be found in a conversation Buffett once had with Peter Lynch, a stock picker who arguably has a stronger track record than Buffett himself.

In 1989, Buffett called Lynch to ask to borrow a line from his book One Up On Wall Street for that year’s Berkshire annual report. That line was as follows: “Selling your winners and holding your losers is like cutting the flowers and watering the weeds.”

As we’ve seen, Buffett has had no shortage of weeds in his investing career. The secret of his success, however, may be that he has historically cut his weeds quickly and held on to his flowers for as long as he possibly could.

By quickly getting rid of stocks that aren’t performing well or have the chance to lose Berkshire Hathaway money, Buffett limits his downside while his good investments generate massive returns through long-term compounding.

Once again, we can look to the unusual 2020-21 period for examples of this. In 2016, Buffett bought up a multi-billion dollar stake in the airline industry that was spread across Delta, United, Southwest and American Air Lines. In 2020, he promptly dumped this position, sensing that the pandemic’s effects could disrupt airline travel and spending patterns for years to come.

Another clear example is that of Conoco Phillips, an oil company Buffett began buying a significant stake in beginning in 2008.

The problem, however, was that he was essentially buying at a market peak. Oil was hovering around $100 a barrel at the time, and oil company stocks were priced accordingly.

Later that year, the financial crisis hit the global economy and oil prices dropped dramatically. Buffett sold a large part of his stake in the company quickly and fully exited the position by 2013.

Even the recent Paramount debacle shows a similar pattern. Buffett bought on the assumption that the stock was undervalued and then sold quickly when it became apparent that his assumptions were flawed. Though this mistake did cost Berkshire a good deal of money, it could have gotten far worse if Buffett had stubbornly held on in hopes of eventual improvements.

On the other hand, most of Buffett’s best investments remain in the Berkshire portfolio for decades on end. The classic example is Coca-Cola, a stock Buffett has held since the late 1980s.

Over the decades, consistent dividend increases have turned the stock into a cash cow for Berkshire. Today, Buffett’s annual yield on cost in his Coca-Cola investment is about 60 percent.

Likewise, GEICO is a company that Buffett has allowed to build wealth for his company over many decades. Buffett’s first investment in the company took place in 1951, though he quickly sold again the following year.

In the 1970s, though, Buffett began buying the stock again in earnest. By the 1990s, Berkshire’s stake in GEICO was worth nearly $650 million.

The company was eventually taken private as a wholly-owned subsidiary of Berkshire Hathaway, and the float produced by its insurance business has been one of the cornerstones of the conglomerate’s financial picture ever since.

So, Is Buffett Actually a Good Stock Picker?

Warren Buffett is considered to be a good stock picker but his greater strength is holding winners for the long-term while cutting losers quickly.

At the end of the day, Buffett is an above-average stock picker who carefully employs the principles of value investing. The truth, however, is that there have been plenty of comparably talented stock pickers and even some better who haven’t approached Buffett’s level of success.

The principles Buffett follows have also been employed by investors like Bill Ackman and the aforementioned Peter Lynch. Though both of these investors have become Wall Street celebrities in their own rights, neither of them can claim to rival Buffett’s wealth or reputation.

So, where Buffett truly excels is in his ability to limit downside risk by quickly selling stocks that no longer seem likely to produce good returns. By quickly removing these stocks from his portfolio and allowing his best picks to continue compounding, Buffett has managed to keep his wins far ahead of his losses.

In fact, Buffett has alluded to this way of thinking personally. He once notably summed up investing in two simple rules. The first rule was not to lose money, while the second rule was not to forget the first rule.

Buffett seems to have followed these rules closely himself, as he keeps his losses to a minimum and makes sure that the stocks that produce his best returns continue to build the value of his portfolio year after year.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.