The headline here isn't newsworthy. We know Warren Buffett is a better investor than the rest of us. His incredible long-term track record at Berkshire Hathaway (NYSE: BRK-A ) , and his avoidance of both the 2000 tech meltdown and the current subprime crisis, prove that.
The question is: Why?
And, perhaps, "how?"
There's one person in this world well-equipped to answer that question: Buffett's longtime friend and business partner Charlie Munger. Happily for us, Charlie likes to talk -- and he addressed this very question last year.
Munger's remarks at 2007’s Wesco Financial annual meeting are wide-ranging and worth reading in their entirety. But boiled down, Munger gave seven reasons why Buffett is a better investor than you:
- He's smart, and he puts his intelligence to good use.
- He has an unflagging interest in investing.
- He started learning about investing early on, when he was 10.
- He's a "good learning machine," and he keeps on learning.
- He has enormous experience in the subject and practices daily.
- He's been rewarded for being a good investor.
- He's objective.
If there's a common thread tying these factors together, it's that Buffett, who does happen to be smart, found something he liked and has worked at it every day for a very long time. So if you want to be like Buffett -- though you may never approach his $62 billion fortune -- start now, practice investing daily, and be objective in your decision-making.
This is easier said than done. Perhaps you have a day job; perhaps you're already 76 (Buffett's age); perhaps you consider yourself not very smart. Whatever the problem, there are reasons why most of us will never be exactly like Buffett.
We will all, however, be much better investors -- and make a lot more money in the process -- if we learn to emulate him just a little bit.
Two ways to be like Buffett
One of the ways Buffett learns so much is through reading. Munger told his audience last year, "If you had an observer ... he would find that Warren spent most of his time sitting on his [rear end] and reading." He advised further, "If you want to succeed, if you really want to be the outlier in terms of achievement, just sit down on your [rear end] and read -- and do it all the time."
In a recent Fortune interview, Buffett spoke to how he generates ideas: "I just read. I read all day. I mean, we put $500 million in PetroChina. All I did was read the annual report."
So the first way to be like Buffett is to make some time to read, and read as much as you can.
The second: Start now. Though you may never get to Buffett's 66 (and growing) years of experience, you can certainly gain more experience than you have now. If you have kids, get them started now.
And one way to invest like Buffett
Avid reading and an early start will go a long way toward helping you be like Buffett. But to prosper financially, you'll also need to know how to invest like Buffett.
Buffett has amassed a fortune in the stock market not by momentum investing or day trading, but by focusing on living, breathing businesses. He gets to know them and -- more importantly -- gets to know what he'd pay to own them. Then he waits until they fall into that attractive price range.
Some of these picks -- like CarMax (NYSE: KMX ) and Moody’s (NYSE: MCO ) -- will get cheap because they face difficult operating environments. Others -- like Burlington Northern (NYSE: BNI ) -- will look cheap because Buffett thinks they can grow more quickly than the market thinks they can. In either scenario, Buffett is focused on the quality of the company and not its external circumstances. He told Fortune recently, "I don't invest a dime based on macro forecasts."
Why macro forecasts don't work
See, your returns in the stock market don't necessarily depend on how well your company does, but rather on how well your company does relative to the price you paid for it. As Wharton professor Jeremy Siegel has written, "The basic principle of investor return ... states that the long-term return of a stock depends not on the actual growth of its earnings but on how those earnings compare to what investors expected."
Consider that Altria has returned more than 250% since 1998, even though cigarette sales in the U.S. have fallen more than 20% over that same time frame. Then consider that while the Internet exceeded almost all late-'90s forecasts, McAfee (NYSE: MFE ) and Nortel Networks (NYSE: NT ) each have negative trailing-10-year returns.
Problem is, 10 years ago, tech stocks had those macro forecasts priced in. (You could make the case that alternative-energy stocks are the same way today.) A sweeping trend does not make an investment thesis -- or, at least, not a complete one. Because prices are just as important as prospects.
And that concludes our article
That's not only why Warren Buffett is a better investor than you, but it also informs the way Fool co-founders David and Tom Gardner invest at Motley Fool Stock Advisor. And to good success so far: Our picks are ahead of the S&P 500 by nearly 40 percentage points on average.
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This article was first published April 25, 2008. It has been updated.
Tim Hanson owns shares of Berkshire Hathaway and CarMax. Brian Richards owns no companies mentioned. The Motley Fool owns shares of Berkshire Hathaway. Berkshire and Moody’s are both Motley Fool Stock Advisor and Inside Value recommendations. CarMax is an Inside Value pick. The Fool's disclosure policy loves fuzzy bunnies.