What Buffett Avoids

Warren Buffett has invested in an old textile mill, utilities, insurance, reinsurance, shoes, chocolate, newspapers, banks, bricks, carpet, food, and more.

“The ideal business is one that earns very high returns on capital and that keeps using lots of capital at those high returns. That becomes a compounding machine.”
Warren Buffett

Buffett loves the insurance business. There are no factories to build, no steep environmental regulations, and the returns on capital are strong.

There are some areas he avoids, or areas that rarely make his investment filter.

  • Healthcare is highly regulated. Berkshire Hathaway owns close to one-third of DaVita, the kidney dialysis services giant, but that represents less than 1% of the firm’s capital1. He avoids hospitals, insurers, and many others. Having seen the Amazon-JP Morgan-Berkshire joint venture collapse, most of healthcare is in the “too hard pile2,” and the returns on capital are often low, below the cost of capital. 
  • Traditional Real Estate. While Berkshire does invest in mobile homes and real estate services, absent from the portfolio are apartment buildings, warehouses, and single-family homes. This exchange at a shareholders’ meeting highlights the reasons why. The tweet version: Mispricing of real estate is less common than in stocks 3. Add the low competitive edge they’d bring, and tax issues related to Berkshire’s tax structure.
  • Cryptocurrencies. Too hard pile4.

Investment success comes in many flavors, levels of concentration, areas of expertise, and whole niches that people avoid. New markets, products, and mispriced securities, with the right time horizon, temperament and filters, provide ample opportunities.

Disclosures: my personal healthcare coverage is a $5,000 deductible cost-sharing plan (non-ACA compliant). Healthcare investments: Covetrus, Cigna, Clover Health, HealthEquity.

Photo by Sophie Backes on Unsplash

  1. For comparison, Healthcare is 18% of GDP and 13% of the S&P 500 index.
  2. At one annual meeting, he and Munger said healthcare challenges are too hard for their skill set
  3. stocks can swing wildly within a given year. See valuation fluctuations in 2020 as an example
  4. Could be an issue of age and energy to understand as well.