Seriously, Warren Buffett Is a Better Investor Than You

At 77 years old, Warren Buffett is no spring chicken. The fact is, most people his age are looking to get money out of the market rather than put money in it.

Yet Buffett is continuing his life's work -- undeterred by age -- in the same way he always has.

See, in helping privately held Mars buy Wrigley (NYSE: WWY  ) last month, Buffett made a deal with zero liquidity in sight. That's precisely the opposite of virtually all investors in private companies (particularly venture capitalists), who demand a clear path to liquidity from the start.

But not Buffett
The Oracle of Omaha has long preached that the long-term is the only view for an investment -- even if the investor is beyond retirement age. He's said before that his ideal holding period is "forever" -- and the Mars-Wrigley-Berkshire deal is yet another example of Buffett putting that theory into practice.

Yet most investors have not learned this lesson. Recent NYSE data showed that the average holding period for a stock is now less than one year.

What truly matters
Buffett's patience, discipline, and willingness to act when others won't make him a better investor than you. Those aren't his only advantages, though. Not long ago, we wrote an article highlighting a few other reasons why Warren Buffett is a better investor than you.

It seemed like a truism to us -- the man has built one of history's great fortunes on the power of his investing acumen, after all -- but some readers took offense.

We got emails telling us that Buffett has tons of advantages over the common man, ranging from his enormous war chest of cash to his access to executives and/or privileged information. But those things aren't as much of an advantage as many readers made them out to be.

For starters …
Buffett's enormous cash position is actually an enormous disadvantage when it comes to earning superior stock market returns. It essentially prevents him from investing in anything other than liquid large caps. Just glance at Berkshire Hathaway's 13-F filing and you'll find multibillion-dollar companies such as Lowe's (NYSE: LOW  ) , Wells Fargo (NYSE: WFC  ) , General Electric (NYSE: GE  ) , and Johnson & Johnson (NYSE: JNJ  ) . Wabco Holdings, with a market cap of $3.2 billion, was the smallest holding disclosed in the filing.

While those are solid companies, their size illustrates how small a pond Buffett fishes in. According to Capital IQ, while there are 6,700 publicly traded companies on our major U.S. exchanges, there are just 1,098 currently capitalized at $3 billion or greater. That means Buffett's cash position effectively locks him out of more than 80% of all companies trading on the NYSE, Nasdaq, or AMEX.

Further, because Buffett has said he won't invest in technology stocks, he's out another 321 opportunities, including companies he reveres, such as Google (Nasdaq: GOOG  ) and Microsoft (Nasdaq: MSFT  ) .

This hurts
All in all, Buffett is restricted to a universe of some 777 stocks -- which is far from ideal. In fact, Buffett has said that he could earn 50% annual returns each and every year if he had just $1 million to invest because it would give him free reign in the market.

With just $1 million or less, for example, Buffett could have taken advantage of recent ridiculously cheap opportunities in the micro-cap sector … such as when $19 million SmartPros traded at an absurd 1.7 EV/FCF ratio last week.

But because SmartPros is so small, Buffett never even bothered with it. Heck, because SmartPros is so small, you probably didn't bother with it, either.

Friends in high places
As for an informational advantage, yes, Buffett has connections. But when he bought a big stake in PetroChina, he admitted that the only research he'd done was to read its annual reports. In other words, he acted on the exact same information available to all of us, and PetroChina tripled during the time Berkshire owned it.

This brings us full circle. It isn't anything artificial that makes Buffett a better investor than you; it's his patience, discipline, and willingness to act when others won't -- even at a healthy 77 years of age.

Buffett may be better … but don't be discouraged
Buffett's abilities did not develop overnight. It's been a lifelong process -- one that began at age 11.

So while he may be a better investor than us today, we can at least learn from his experiences and -- like he did -- become superior investors over time. That means:

  1. Buying for life (or, at least, the long term)
  2. Buying small (perhaps our lone advantage)
  3. Buying based on thorough research and due diligence

Put it all together and Buffett exemplifies what we try to achieve with our members at Motley Fool Hidden Gems: the pursuit of mastery in investing in the small-cap space. We study companies as small as SmartPros every day and recommend only the best opportunities to our subscribers.

That tack has helped our service perform 23 percentage points better than the market on average. If you'd like to learn what companies we're recommending for new money, click here to join Hidden Gems free for 30 days.

Tim Hanson owns shares of Berkshire Hathaway. Brian Richards owns shares of Microsoft. Johnson & Johnson is a Motley Fool Income Investor recommendation. Microsoft and Berkshire are Inside Value selections. Berkshire is also a Stock Advisor pick. The Motley Fool owns shares of Berkshire and always discloses its disclosures in the disclosure policy.


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  • Report this Comment On May 24, 2008, at 1:38 PM, crca99 wrote:

    Mr. Buffett buys venerable brand name companies with products of lasting direct to consumer appeal that have acquired a bit of tarnish with age. He goes in with famous charm and teaches management how to restore shine. I can't do that. He benefits, and I watch and try to learn.

  • Report this Comment On May 25, 2008, at 8:24 PM, Zenophon wrote:

    It's also about the ability to take on risk. Buffett can afford to lose a billion or a million or a couple 100K while he waits for the turnaround.

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