4 Warren Buffett Myths Debunked

As arguably the greatest investor of all time and one of the richest people on the planet, Berkshire Hathaway (NYSE: BRK-A  ) (NYSE: BRK-B  ) CEO Warren Buffett possesses an uncanny ability to gracefully endure having nearly every aspect of his life monitored, studied, praised, and ridiculed.

All too often, though, persistent Buffett-related misconceptions manage to spread among the masses, running almost entirely unchecked. Let's pick apart a few of the most common myths, then, regarding the notorious Oracle of Omaha.

Myth No. 1: Buffett just got lucky
First, many can't help but wonder whether Buffett simply got lucky in picking the right stocks.

After all, statistically someone had to get nearly everything right, so isn't it possible Buffett's stock picking prowess all comes down to an extraordinary case of serendipity?

But consider this: In June, 1942, Buffett bought his first stock at the age of 11. By the age of 14, using around $1,200 he earned from his paper route, Buffett bought 40 acres of Nebraska farmland, which he proceeded to lease out to merchant farmers.

Buffett turned 83 yesterday, which makes an incredible 72 years of methodically building his fortune not only through investing in the stocks of solid businesses over the long term, but also through taking deliberate steps to consistently earn the capital required to make those investments in the first place.

That's why, over the better part of the last century, Buffett's investing methods have been proven right over, and over, and over again. All told, in the nearly 49 years between 1964 and the first half of 2013, those methods have helped him grow Berkshire's book value by an incredible 631,415%. 

Then again, Buffett has admitted to at least one form of luck, but not regarding his investing abilities.

In a letter he penned for the Giving Pledge organization he co-founded, he chalked it up to compound interest, "some lucky genes," and being born in America, a country "that rewards someone who saves the lives of others on a battlefield with a medal, rewards a great teacher with thank-you notes from parents, but rewards those who can detect the mispricing of securities with sums reaching into the billions."

Myth No. 2: Buy it like Buffett
Though Buffett is a great investor, that doesn't mean we should all follow his lead, buying every stock he buys each quarter.

Remember, Buffett is working with a capital base so large most retail investors simply wouldn't be able to fathom what to do with it. 

And besides, more than a decade ago, Buffett himself admitted one of our greatest strengths as small investors is having less money, which in turn gives us access to a much broader investment universe he no longer enjoys.

As noted by Matt Koppenheffer, the author of The Motley Fool's free special report "Warren Buffett's Greatest Wisdom," "When Buffett buys a stock, there's a rush of everyone buying the exact same thing. But that misses the point. The Buffett lesson is to know certain areas really well and stick to your circle of competence, not just buy exactly what Buffett buys."

In short, while you won't go broke mimicking Buffett's portfolio today, if you want to truly emulate his past successes, you're better off doing your own homework and looking elsewhere.

Alternatively, you might consider picking up some shares of a "mini-Berkshire" business that employs almost exactly the same techniques Buffett used to create value for Berkshire shareholders. Markel (NYSE: MKL  ) , for example, is another insurer and financial holding company that's currently about 1/40th the size of Berkshire. In addition, Markel's president and CIO so happens to be noted value investor Tom Gayner. Best of all, Markel also happens to look incredibly cheap right now following its recent merger with fellow insurer Alterra Capital.

Myth No. 3: Buffett and his children live like billionaires
Next, many people wrongly believe Buffett and his family live like stereotypical rich folks, remaining out of touch with reality and taking advantage of their wealth to live extravagantly. 

But while Buffett's roughly $57 billion fortune is indeed staggering, remember he's already given away around 204.62 million of his class B Berkshire Hathaway shares to charity, a stake worth around $22.7 billion based on the stock's recent price of around $111 per share.

What's more, late last year, Buffett confirmed he still drives a Cadillac he bought "around six or seven years ago," and still lives in the relatively modest Omaha home he bought in 1958 for $31,500.

Warren Buffett's home 

Warren Buffett's Omaha home, Image Source: Wikimedia Commons.

In his words, he's "never had any great desire to have multiple houses and all kinds of things and multiple cars."

In addition, Buffett's children have long known they would never inherit their father's wealth as he plans to give around 99% to five charities, with more than three quarters going to the Bill and Melinda Gates Foundation. The remainder, then, is currently split between four other organizations, including one named for his first wife and three charities run by his children.

But before you assume that means Buffett's kids really are getting his money, remember all of that dough is meant to help better other people's lives, not their own.

In fact, in talking about his own "inheritance" of roughly $90,000 in Berkshire stock back in 1979, Buffett's son Peter elaborated on his dad's thoughts on wealth in 2011:

My dad didn't believe in misallocated capital and he didn't believe in inherited wealth. The Berkshire Hathaway stock was my big head start and it was kicked in my head that it would be all I would get. People wrongly assume we [kids] get piles of money from our dad. [...] I watched someone who transferred values to me, and not wealth.

Myth No. 4: On taxes, Buffett must have a hidden agenda
Finally, many people call Buffett a hypocrite for giving the vast majority of his fortune to charity -- tax free -- while at the same time supporting both the estate tax and increases in taxes on the wealthy.

New Jersey Governer Chris Christie, for one, demonstrated this common confusion last year with his angry assertion that, rather than talking about reforming taxes to shift more of the burden to the wealthy, Buffett "should just write the check and shut up."

The thing is, it's not that hard to understand why these seemingly contradictory actions can peacefully coexist, as Buffett later explained in reaction to Christie's comment:

It's sort of a touching response to a $1.2 trillion dollar deficit, isn't it? [...] The real problem is we're taking in too little money and we're spending too much. That's not going to be solved by voluntary contributions. What we need is a policy, a tax policy.

Bottom line: Buffett's right that even his vast fortune, if donated in its entirety to the government, would barely put a dent in the massive national deficit. In addition, even if he were to do so, it's unlikely that other wealthy individuals would follow suit, making it a fruitless gesture compared to its potentially wide-reaching philanthropic effects.

If, on the other hand, the government were to require higher taxes for wealthy folks like Buffett, you can bet the end result would be much more potent.

What's more, remembering he is not passing significant wealth to his children for their own benefit, Buffett made his position on the estate tax clear when he signed a document stating he believes it is "right morally and economically" because it "promotes democracy by slowing the concentration of wealth and power." In short, he says, dropping the estate tax would wrongly enable the ability to "command the resources of the nation based on heredity rather than merit."

Foolish takeaway
In the end, think of Buffett what you will, but the facts speak for themselves. That's why I'm convinced Buffett is simply one honest billionaire who happened to become rich by effectively playing by the same set of rules we all have.

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  • Report this Comment On August 31, 2013, at 10:50 AM, djconklin wrote:

    QUOTE: Buffett "should just write the check and shut up."

    Buffett's unthinking critics heard that and jumped on it and have been repeating it ever since. The truth is that they cannot stand anyone who thinks differently than they do. They are willing to deny him his freedom of speech, so that their lies can be heard.

  • Report this Comment On August 31, 2013, at 12:07 PM, BayCountry wrote:

    Are you Buffett's press secretary?

    C'mon, we're not that stupid. Anyone who does a little research knows what Buffett says and what he does are two completely different things. I'm all for capitalism, but Buffett is just another crony-capitalist ... and disingenuous about his secretary paying more in taxes than him. He knows capital gains taxes are lower for a good reason.

    You're right about one thing. We cannot take our investing cues from him. We can't get 10% dividends on Goldman Sachs warrants or buy Heinz with 9% dividends like Buffett with his special deals.

    The guy acts like your kindly old grandfather, but anyone who's done their homework understands he's really Gordon Gekko.

  • Report this Comment On August 31, 2013, at 12:11 PM, banmate7 wrote:

    Reading and studying Buffett has made a material difference in my life. I've manged 12% - 18% annually on most of my value investments since the mid 2000s. Up to then, I mostly invested in mutual funds, but then got turned onto value metrics & individual stocks.

    I wish I had learned about value investing much earlier. It is a fairly straight forward approach to getting superior returns on your basis over time. Buy great companies at cheap to fair value. Reinvest dividends. Hold forever. Time is on your side.

    If more Americans invested like this, it would reduce make short term market manipulation mere noise. Volatility would diminish. People would wise up to how actively managed mutual funds manipulate their money in chasing growth.

  • Report this Comment On August 31, 2013, at 12:20 PM, banmate7 wrote:

    @BayCountry

    One can certainly use Buffett's value investing methodology to your advantage. And as smaller investors, we actually do have more of an advantage due to smaller scaling issues.

    The S&P 500 has returned 27% since 2006. At least this is what Yahoo Finance draws when I juxtapose MSFT and the S&P 500 on their charts.

    Here is how my MSFT has performed. The 1st investment is my basis. The rest are reinvested dividends.

    date shares total_price price_per_share

    05/08/2006 500.0 $11,831.95 $23.66

    09/14/2006 1.726 $45.00 $26.07

    12/14/2006 1.686 $50.17 $29.76

    03/08/2007 1.813 $50.34 $27.77

    06/14/2007 1.654 $50.52 $30.54

    09/13/2007 1.746 $50.69 $29.03

    12/13/2007 1.594 $55.95 $35.10

    03/13/2008 1.959 $56.12 $28.65

    06/12/2008 2.053 $56.34 $27.44

    09/11/2008 2.112 $56.57 $26.79

    12/11/2008 3.35 $67.12 $20.04

    03/12/2009 4.062 $67.56 $16.63

    06/18/2009 2.902 $68.09 $23.46

    09/10/2009 2.752 $68.47 $24.88

    12/10/2009 2.311 $68.82 $29.78

    03/11/2010 2.383 $69.12 $29.01

    06/10/2010 2.769 $69.43 $25.07

    09/09/2010 2.895 $69.79 $24.11

    12/09/2010 3.166 $86.36 $27.28

    03/10/2011 3.397 $86.87 $25.57

    06/09/2011 3.666 $87.41 $23.84

    09/08/2011 3.34 $88.00 $26.35

    12/08/2011 4.343 $110.67 $25.48

    03/08/2012 3.475 $111.54 $32.10

    06/14/2012 3.856 $112.23 $29.11

    09/13/2012 3.701 $113.00 $30.53

    12/13/2012 4.766 $130.80 $27.44

    03/14/2013 4.71 $131.90 $28.00

    I might have missed my last dividend payment. But my $11,699.00 basis is now worth $19,439.60, a 66% gain. I bought MSFT when the PE < 11. It really deserves a PE between 16 & 20, which I believe will happen soon enough.

    I have similar returns in other stocks. Coca-Cola has given me 125% cumulative return since 2006. Therefore, I disagree with you totally about casting aspersion on Buffett.

    As I said, study his methodology & apply it for yourself. It works. I find this of greater utility than applying a prism of political ideology in slandering the successful.

  • Report this Comment On August 31, 2013, at 7:03 PM, inreality01 wrote:

    We should have a small flat tax that is applied equally to all citizens with no exceptions. We should not be using the tax code to punish some and reward others, this is not what that tax code is suppose to be for. The tax code is simply suppose to raise enough revenue to fund essential government, nothing more and nothing less.

    We don't need more money in government, we need dramatically less money. The crazy thing is, if we had a small flat tax it would very likely lead to more government revenue because our economy would grow much more rapidly.

    If Buffett wants to donate to people and to government he is free to do so, just as any other person in this great nation can. Giving of yourself is great but advocating that others should give because you think they should is simply ridiculous. People are not obligated to pay for huge government or give their wealth to others and we should be protecting every citizen in this nation and their ability to keep their own wealth.

    Government taxation and regulation is killing the dreams of many people in this nation and doing it in the name of compassion for the poor when in reality it has nothing to do with this and everything to do with power and greed.

  • Report this Comment On August 31, 2013, at 11:58 PM, predfern wrote:

    The idea that the estate tax slows down concentration of wealth had been debunked. See

    Wealth Inheritance and the Estate Tax

    http://object.cato.org/sites/cato.org/files/articles/st289.p...

  • Report this Comment On February 23, 2014, at 3:25 AM, Bananabender wrote:

    Warren Buffett owns a collection of extremely expensive houses in several states. He travels in a private jet. He socialises with other billionaires at luxury resorts. In other words he's a typical billionaire.

    Buffett made most of his best investments in the 1960s. He missed the three of the best investments of the past 30 years - AAPL, GOOG and MSFT.

    Berkshire Hathaway has performed worse than the S&P 500 over the past five years.

  • Report this Comment On February 23, 2014, at 6:41 PM, TMFSymington wrote:

    @Bananabender, I respectfully disagree.

    First, as far as I know, Buffett still lives in the modest five bedroom home he bought in Omaha in 1958 for $31,500. Your sources for his "collection of extremely expensive houses in several states?"

    And yes, his company owns NetJets, so it shouldn't be surprising Warren Buffett travels in a private jet -- one he initially named "The Indefensible" given his past criticism of such purchases. However, he since renamed it "The Indispensable" after realizing its value as a business tool given his excessive travel requirements as CEO of Berkshire.

    And you're right; keeping in mind I published this article six months ago, as of right now Berkshire Hathaway has underperformed the S&P 500 over the past 5 years.

    However, keep in mind that almost exactly 5 years ago the stock market was about to bottom out after a historic crash, and has rebounded furiously since then.

    Has that made Berkshire Hathaway a terrible investment? Hardly. As of the end of 2012, Buffett had NEVER suffered a five-year period of underperformance, having beaten the S&P in all such 43 periods since he became CEO.

    But in Buffett's words, and as a fantastic defensive company, they do better with the wind in their faces.

    The most recent epic rally, then, is likely to end that streak. More on that here: http://www.fool.com/investing/general/2014/01/04/buffetts-gr...

    Thanks for reading and Fool on!

    Steve (TMFSymington)

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