Oracle of Omaha, Warren Buffett has been in news lately for tipping his son Howard Buffett to be the new chairman of Berkshire Hathaway (source). By profession, Howard is a farmer. Company’s investment strategy would still be governed by the CEO and Board of Directors. But Warren Buffett’s son would serve as a Custodian of Company values rather than take part in regular day to day affairs.
So what makes Warren Buffett so special? On very first page of his famous and revered Annual Letters to Shareholders (2011, 2012), it is mentioned that from 1965-2010 (a period of 45 years), Berkshire has had a CAGR of 20.2% i.e. your money doubles every 4 years!
Can average investors like you and me, who don’t know so many things beat that performance?
Can we earn 20% year on year for decades? I doubt that.
|You are not Warren Buffett. Period.|
Such superlative performance can have have the effect that average investors try to become the next Warren Buffett. But in doing so, they would be making a grave mistake. That’s because-
- Most profits made by Berkshire come from owning entire companies, which an average investor is incapable of doing.
- Though Buffett gives independence to individual companies’ management, he always keeps a tab on them to see that they don’t deviate from Berkshire’s simple but sacred principles. As far as an average investor is concerned, he doesn’t even meet any member of the company’s management.
- Buffett owns the perfect business of insurance. This is equivalent of having a constant source of interest-free loans given to buy shares of other companies. Now who among us can boast of ownership of such a business?
- Inspite of being famous for having a holding period of forever, Buffett occasionally sells stocks. Unlike us, he doesn’t require money for his basic needs. He sells when he does not see value in his investments or wants to fund more lucrative investments.
- Unlike average investors, he has access to loads of insider information and has an army of people who can do comprehensive number crunching for him. This augments his investment decision making process.
- For him, return of capital is more important than return on capital. But this statement requires a lot of discipline and will-power to be put in practice. An average investor is attracted by prospects of high returns from risky companies. He is ‘absolutely’ not ready to do his due diligence and find a few large and stable stocks trading at discount to their real values. Day traders use various tools like 200 Day Moving Averages for earning a quick buck. But they forget that they can also use these 200 Day Moving Averages to help them in investing for long term.
- Buffett is a fast and voracious reader. We can’t imagine an average investor to read Forbes, Wall Street Journal, Financial Times, New York Times, USA Today and Omaha World-Herald every single day of the year, decade after decade. (For Indian Investors, replace above names with Indian financial newspapers and publications). Even if a person does read a few good publications, the question arises whether he will he be able to utilize and interpret this information to his advantage?
- An average investor does not get deals which are skewed heavily in his favor. Buffett got one hell of a deal from Goldman Sachs, where he was earning $500 million every year for doing simply nothing!!! And when Goldman Sachs decided to redeem the preferred stocks, Warren was the unhappiest person in the world as any normal person would hate to lose a free cash flow of $500 Million an year. Very recently, he entered solar energy via Topaz. An interesting article shows once again that why and how he lands up such delicious deals.
Warren Buffett had once said – “My wealth has come from a combination of living in America, some lucky genes, and compound interest”. Out of these three, only compound interest, is under our control.
Though compounding has a peculiar problem, it still works for those who are patient enough.
So an average investor should focus more on buying good stocks and allowing compounding to show its magic. But instead, what he does is that he is constatnly on a lookout for stock tips and is looking to find the next multibagger. As a sensible investor, one should be prepared for opportunities which markets throws up every now and then. And when that opportunity comes, be prepared to take advantage of them.
Nice article, very disturbing to read the first few points on how one cannot be Mr.Buffett. Compounding is what one can bet on. But, Mr.Buffett would not time the market, what he will look for is a good stock that is going up on sale (for huge discount).
It's indeed disturbing to realize by virtue of being an average investor, its tough to replicate the success like those of Buffett(s) and Lynch(s). Its always better to focus on things which are controllable like selecting safe stocks with earning visibility, sticking with these stocks for years & reinvesting the dividends.
it's because of people like the guy who wrote this article that wonderful human beings fail to recognize how great they are. A public-opinion poll is no substitute for thought – WARREN BUFFETT
Bang on target Tarek!! 🙂
Legends don't endure for thousands of years without reason.
And Warren Buffett is going to be a legend for coming thousand years.