You'll Never Be Warren Buffett, but You Can Invest Like Him

The Sydney Morning Herald in Australia today published an article titled: "Face it: you are never going to be Warren Buffett."

Here's a quote from the writer, stock market newsletter publisher Marcus Padley:

It is my contention The Warren Buffett Way and the way investors and advisors alike have skimmed the surface and pretended to apply his methods has cost the average investor more money than it has ever made them. I have no problem with Warren Buffett himself, but with the popular delusion we can and should do what he does, or at least, has done in the past.

But most people don't do what Buffett does, which is primarily buy into good, solid companies and then sit on his butt, letting the companies he owns (either outright or indirectly through shares) do the heavy lifting. He holds and holds and holds, through good times and bad. He's not out there trading, trying to time good entry and exit points. That's what kills investors -- all that trading. (Barber and Odean showed that.)

I work for Motley Fool Stock Advisor as the senior analyst. I'll be the first to tell you that the service rarely sells, but over the past dozen years it has absolutely crushed the S&P 500. Yet we're criticized for rarely selling!

Personally, my oldest holding is Coca-Cola (NYSE: KO  ) , which I first purchased on Aug. 2, 2002 -- I'm going on 12 years with that one, and I don't plan on ever selling it. My next-longest holdings are Meritage Homes (NYSE: MTH  ) and Netflix (NASDAQ: NFLX  ) , each at seven years, followed by Inuitive Surgical (NASDAQ: ISRG  ) at six years.

Everyone knows Buffett's quotes about having a limited punch card, buying great businesses at good prices, the whole "fearful versus greedy" thing, ad infinitum, and everyone tries to apply that advice with varying success. But his "secret" is something that most people seem incapable of doing: Do nothing once you've bought the shares.

I think Warren offered his best advice -- which many seem to ignore because it goes against their own urges -- when he said that he'd be richer today (and he's already richer than most everyone on the planet) if he had never sold a thing, even the losers. Not that he follows that advice; he has sold some stocks, as we all have.

However, the more I learn about investing and observe other people investing, the more I realize how few people are actually capable of doing nothing. For one, it makes for terrible cocktail party conversation:

Hotshot Investor: "Hey, Jerry, I made a killing on my latest investment! Bought last December and sold it today for 32% gains, baby!" (Hotshot has conveniently forgotten the three other times when he sold for 20% losses, so he's not even breaking even.)

Warren Wannabe: "That's nice, John."

Hotshot: "So what great wins have you made recently?"

Wannabe: "Oh, nothing much."

Hotshot: "C'mon! You have to have made some money recently. Spill!"

Wannabe: "Well, my last sale was 16 months ago."

Hotshot: "Hey, isn't that Susan over there? Gotta go say hi." (It occurs to John that Jerry is quite a boring person.)

Investing is supposed to be exciting! It's a competition where the winner gets the spoils (or at least Susan), so get out there and fight!

Unbeknownst to Hotshot John, however, Wannabe Jerry's annualized returns are 14.8%, while John has only managed to eke out 2.7% per year over the past 10 years, trading in and out and trailing the SPDR S&P 500's 7.1% annualized gains.

I've been investing for just shy of 13 years -- one year longer than Stock Advisor has been around -- and I've invested full-time for the past six-and-a-half years. I may not be the most experienced investor out there, and I've certainly made my share of mistakes (sometimes I think more than my fair share). I'm a piker compared to many of you.

However, I have learned the answer to this question posed by Padley: "Seriously, if it was possible to imitate Warren Buffett and transplant Warren Buffett's judgment into another fund manager, would we not know about it and wouldn't his fund be the highest returning fund in the market and wouldn't we all be invested and be billionaires?"

The answer is no, because the people invested in such a fund wouldn't allow themselves to stay in it. Instead, they'd be chasing the next big winner when the fund's value dropped or the fund manager ignored investments in hot tech stocks (as Buffett did during the dot-com craze), or the manager otherwise failed to correctly rotate into the sectors hyped so breathlessly on CNBC. Gotta get into those winners, after all!

You want to be like Warren Buffett and get returns like him? Here's the two-step formula:

  1. Buy good companies with great management at an acceptable price.
  2. Don't sell until you need the money for its intended purpose, years from now.

Two steps. Should be easy.

But that second one is probably the hardest thing any investor can ever do.

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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 10, 2014, at 12:02 PM, supplysider5 wrote:

    "Investing is where you find a few great companies and then sit on your ass." -- Charlie Munger

  • Report this Comment On April 10, 2014, at 4:05 PM, The1MAGE wrote:

    Warren Buffett also doesn't reinvest his dividends, but stockpiles them.

    Then he goes on a shopping spree every time the market crashes.

    I'm fairly certain he won't wait if a good deal presents itself, but I am sure he keeps track of stocks he is interested in that don't yet meet his criteria because of price.

  • Report this Comment On April 12, 2014, at 1:35 AM, AnsgarJohn wrote:

    Via Twitter I asked Marcus Padley if he had read "Superinvestors of Graham-and-Doddsville PDF "a speech by Buffett explaining that everyone who follows Graham's Margin of Safety methods will outperform in the long run. No response...not surprisingly ;)

  • Report this Comment On April 12, 2014, at 1:36 AM, AnsgarJohn wrote:

    Also check out "Float and Moat PDF"

  • Report this Comment On April 13, 2014, at 6:56 AM, skypilot2005 wrote:

    Jim,

    Has Buffet commented on the CEO pay issue?

    re,:

    Coke's compensation plan is "outrageous" and "excessive": Wintergreen's David Winters

    By Morgan Korn

    April 11, 2014 12:17 PMDaily Ticker

    David Winters, CEO of Wintergreen Advisers, won't back down from his battle with the world's largest soda maker. Winters has openly criticized Coca-Cola's (KO) proposed 2014 equity compensation plan, calling it "potentially highly dilutive to shareholders"..."unnecessary"..."unsupported by any strategic rationale" and "a bad precedent for corporate America." And that's not all.

    In a March 21 letter to Coca-Cola's board of directors, Winters characterizes the proposal as an "outrageous grab" and an “excessive transfer of wealth” from Coca‐Cola shareholders to the company’s senior management.

    Winters accuses Coca-Cola of not adequately disclosing its equity plan in proxy materials. Wintergreen Advisers, which owns about 2.8 million shares of Coca-Cola, will ask board members to withdraw the proposal at the company's April 23 shareholder meeting. Calvert Investments and The Ontario Teachers’ Pension Fund announced this week that they will vote against the compensation plan; Calvert also seeks a resolution that would separate the chairman and CEO roles.

    "The plan has the potential to dilute shareholders by 14.4%," says Winters in the video above. "That's a transfer of about $28 billion worth of equity to 6,400 people, or 5% of [Coke's employees]. We need a more shareholder-friendly equity plan."

    Best

  • Report this Comment On April 13, 2014, at 11:01 AM, srinidispostable wrote:

    2014 H1B-Visa Sponsorship Reports http://is.gd/2tMcL7

  • Report this Comment On April 14, 2014, at 6:30 PM, xetn wrote:

    I think the title of this article is complete BS. For example, Buffett does not invest in a few shares, he buys huge numbers of shares to the point he often obtains board status.

    Who else on this list can do this? No One.

  • Report this Comment On April 14, 2014, at 7:36 PM, cmalek wrote:

    The entire article is bovine excrement. Buffet did not turn his original stake into $billions by buying "good companies" and sitting on them. If he did sit on his original investments, he'd be worth no more than a couple hundred thousand dollars. He must have sold and/or traded many times during his investing career. Paper gains are monopoly money and worth just as much. A stock certificate for 100k shares of BRK.A will not buy you a cup of coffee or even a stick of gum. To make money on stocks, you have to sell them at some point.

  • Report this Comment On April 15, 2014, at 5:13 PM, ElCid16 wrote:

    Wonderful article.

  • Report this Comment On April 16, 2014, at 12:51 AM, foolishlycuriose wrote:

    The 'Oracle of Omaha' is not the same guy who made his 'seed' money as a hedge fund manager years ago through his limited partnerships. He has evolved as most investors do if they want to be successful over the long term. To suggest that he does not sell anything or that he would be richer today if he had not sold anything is a bit of a stretch. Suffice it to say that his record of allocating capital is one of the best. But if you want to invest like Warren Buffett why not purchase shares of Berkshire.

  • Report this Comment On April 16, 2014, at 8:30 AM, EdV wrote:

    May I give my opinion on Marcus Padley from an Australian's perspective?

    First of all, I'm surprised he's popped up here in a mention on this site.

    Marcus Padley is a stockbroker of some repute I guess but what irritated me the most about him is that he appeared ad nauseam on Alan Kohler's now-defunct "Inside Business" program which aired every Sunday morning on the ABC in Australia (this show finished late last year). I would comment to my wife, "I bet Marcus is on again this week" ... and there he was!

    He's slick and a self-promoter so I can only imagine he enjoys drawing attention to himself fairly regularly and cheaply. I don't hate Marcus, but I didn't enjoy him either. I have to say I'm completely underwhelmed by him and find there are much better educated and better informed people in the media than this guy.

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