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

Rebutting an article published Down Under.

Apr 9, 2014 at 3:26PM

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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Jim Mueller owns shares of Coca-Cola, Intuitive Surgical, Meritage Homes, and Netflix. Jim Mueller has the following options: short June 2014 $365 calls on Netflix. The Motley Fool recommends Coca-Cola, Intuitive Surgical, Meritage Homes, and Netflix. The Motley Fool owns shares of Coca-Cola, Intuitive Surgical, and Netflix and has the following options: long January 2016 $37 calls on Coca-Cola and short January 2016 $37 puts on Coca-Cola. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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