A Warren Buffett lesson in investing

by Anthony Hilton

The London Business School's Global Investment Returns yearbook shows investment winners since 2000 have been old industries such as tobacco and mining. Anthony Hilton says finding such sectors is the secret of success for legendary investor Warren Buffett...

If in 2000 a stock-market investor had been asked to decide which industries or sectors would dominate the first decade of the new century, he or she would probably have gone for computer hardware and software and fixed and mobile telecommunications, with an outside bet on the media.

They would then have learned a harsh lesson. Thanks to the Global Investment Returns yearbook, we can see they would have lost 95% of their money on computer hardware; 88% on software, 67% on fixed-line telecoms, 62% on mobile telecoms and 53% on the media.

There was a sector in 2000 where you could have made almost 10 times your money in the next seven years. But who would ever have chosen tobacco, up 960%? It was followed more rationally by mining, up 667%, personal goods, up 521%and presumably reflecting the debt-fuelled consumer boom, and household goods, up 400%.

As Professor Elroy Dimson, one of the three professors at London Business School who compile the yearbook put it, this is the long-run triumph of the boring. It reflects the thinking of Warren Buffett, the world's most successful investor who avoids the new, the fashionable, the revolutionary and anything that promises transformational change.

Buffett's view is that investors should never confuse innovation with the opportunity to make money. He avoids new industries because they attract so many entrants that no one makes any money. Picking the handful that will survive and prosper from the many more that will go out of business is a question of luck not judgment, and that is no way to invest.