Warren Buffett's Staggering Success Rests on This 1 Must-Have Attitude

The average investor should take note.

Aug 17, 2014 at 1:32PM

Buffett Owner Quote

Warren Buffett once compared his stock-picking style to his shopping habits, noting, "I like buying quality merchandise when it's marked down."

Sounds simple enough, right? Like the frugal shopper in all of us, Buffett loves finding a good bargain.

In investing, however, the Oracle of Omaha excels where the rest of us so often stumble: Once he commits his money to a stock, he cherishes that ownership interest like few other shareholders. This long-term perspective provides ample time for Buffett's businesses to flourish, thereby compounding the money that Berkshire Hathaway (NYSE:BRK-A)(NYSE:BRK-B) makes from his stock picks.

In 1993, Buffett described why this unique level of commitment makes sense in his letter to shareholders, as conveyed in the quote shown above. The charts that follow reveal why other investors should take a page out of Buffett's book.

Shareholders' shrinking attention span
It would be difficult to single out one trend as the most important change in the investing field during the past half-century, but the dwindling attention span of investors would definitely rank near the top.

From 1960 to 2010, the average holding period for owners of NYSE-listed stocks shrunk from 8.3 years to a mere six months. Here's what that looks like in a simple bar chart:

 Holding Period

In other words, Americans once held on to their stocks like they held on to a reliable car -- for the better part of a decade. Fast-forward 50 years, however, and our thinking as it relates to those two assets has diverged dramatically. We're ready to replace a long-term investment with a new security every six months, or around the time that new-car smell is just starting to fade.

To witness such a steep decline is nothing short of astounding. Since the 1960s, not a whole lot has changed in terms of what stock ownership offers to investors. We continue to purchase shares that entitle us to a fraction of a company's future profits. Those companies allocate resources to operations or long-term projects and pay out the remainder to shareholders. As profits grow, we realize a gain in our asset value or receive proceeds in the form of regular dividends, just as we always have.

Meanwhile, business cycles have not shortened, but instead they follow the same typical four-to five-year pattern of contraction and expansion. That's a trend that's more or less remained constant for 160 years.

The act of trading, of course, has changed significantly. Even the nonprofessional investor can conduct cheap, real-time trades today, and he can do so from almost anywhere in the world with the use of a smartphone. But reduced friction in trading can hardly be blamed for such a profound shift in our investment approach.

The main culprit here is a radically different perception of what stocks and the market as a whole represent. A dense cloud of short-term thinking appears to have blurred the vision of many investors, while disciples of the buy-and-hold approach -- including Warren Buffett -- have been able to remain above the fray. As our time frame contracts from years to months, Buffett's found success in a holding period that can often be measured in decades.

The simple genius behind Buffett's approach
Take a look at the chart below. What it shows is how starkly different Buffett's approach is from the average investor's. Not only has he clung to some of his most famous stock picks, including Coca-Cola and GEICO (which Berkshire now owns outright), but the average holding period across all of Berkshire's common stock investments is an eye-popping 20 years. In today's market, that's 40 times as long as the typical investor's holding period!

Buffett Holding Period

As always, what's particularly impressive about Buffett is his simple approach and consistency, even when he sees the rest of the herd moving in a different direction. The data reflected in the chart above includes every common stock investment made by Berkshire from 1977 to 2009, a period of time when the behavior of most investors was changing considerably. Throughout that time frame Buffett stuck to his guns, and he had a simple rationale for doing so.

Instead of thinking like a trader, Buffett adapted a true owner's mentality. Even when Berkshire owned only a tiny slice of a company's common stock, Buffett pretended as though he owned it all. By putting himself in the shoes of an owner, Buffett acted like one. Here's how he described this tactic in his 1993 letter to shareholders:

A parent company that owns a subsidiary with superb long-term economics is not likely to sell that entity regardless of price. "Why," the CEO would ask, "should I part with my crown jewel?" Yet that same CEO, when it comes to running his personal investment portfolio, will offhandedly -- and even impetuously -- move from business to business when presented with no more than superficial arguments by his broker for doing so.

The path less traveled can lead to riches
When times are bad, most investors are tempted to sell in fear of losing more money. When times are good and a stock price is high, they're tempted to take the money and run.

In acting like an owner, Buffett hardly ever follows those temptations, and this strategy has served him quite well. Recent data show that the average investor's 30-year annualized return was a meager 1.9%. Meanwhile, Berkshire's compounded annual gain since 1965 is a staggering 19.7% annualized.

Buffett's owner-centric strategy might be as rare as a black swan riding a unicorn these days, but the results speak for themselves. If you want to rid yourself of the temptation to hop in and out of the market, think like Buffett does. Think like a real owner.

Warren Buffett: This new technology is a "real threat"
At the recent Berkshire Hathaway annual meeting, Warren Buffett admitted this emerging technology is threatening his biggest cash-cow. While Buffett shakes in his billionaire-boots, only a few investors are embracing this new market which experts say will be worth over $2 trillion. Find out how you can cash in on this technology before the crowd catches on, by jumping onto one company that could get you the biggest piece of the action. Click here to access a FREE investor alert on the company we're calling the "brains behind" the technology.

Isaac Pino, CPA, has no position in any stocks mentioned. The Motley Fool recommends Berkshire Hathaway and Coca-Cola. The Motley Fool owns shares of Berkshire Hathaway 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers