Seriously, Warren Buffett Is a Better Investor Than You

At 78 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 a few months back, 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. And while there weren't many people who could have contributed $5 billion to Goldman Sachs, getting a guaranteed 10% yield along the way, having lots of cash isn't necessarily the advantage many readers made it 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. His deals in the past weeks included Goldman, General Electric, and Constellation Energy (NYSE: CEG  ) . Or just glance at Berkshire Hathaway's 13-F filing, and although you'd recently find tiny liquidation play Comdisco Holding, you'll predominantly find multibillion-dollar companies such as Wal-Mart (NYSE: WMT  ) , Burlington Northern Santa Fe (NYSE: BNI  ) , Norfolk Southern (NYSE: NSC  ) , M&T Bank (NYSE: MTB  ) , and Gannett (NYSE: GCI  ) .

While those are solid companies, their size illustrates how small a pond Buffett generally fishes in (Comdisco is a shocking exception). According to Capital IQ, while there are more than 25,000 companies trading on the world's major exchanges, there are just 1,403 currently capitalized at $3 billion or greater. That means Buffett's cash position effectively locks him out of 95% of all public companies.

Further, because Buffett has said he won't invest in technology stocks, he's out another 123 opportunities, including companies he reveres, such as Google.

This hurts
All in all, Buffett is restricted to a universe of some 1,200 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 rein 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 $15 million SmartPros traded at an absurd 1.7 enterprise value/FCF ratio not too long ago.

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 78 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 subscribers.

That tack has helped our service outperform the broader market since inception in 2003. If you'd like to learn what companies we're recommending for new money, click here to join Hidden Gems free for 30 days.

This article was first published May 23, 2008. It has been updated.

Tim Hanson owns shares of Berkshire Hathaway. Brian Richards does not own shares of any company mentioned. Berkshire Hathaway is an Inside Value and a Stock Advisor recommendation. Google is a Rule Breakers selection. Wal-Mart is an Inside Value pick. The Motley Fool owns shares of Berkshire and always discloses its disclosures in the disclosure policy.


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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 October 27, 2008, at 2:33 PM, madmilker wrote:

    not so!

  • Report this Comment On October 27, 2008, at 5:08 PM, sarcastro999 wrote:

    Seriously, Fool- you guys have GOT to stop writing uncritical, fawning pieces about Warren Buffett. I don't know if you guys are expecting a lunch invitation or what, but this is getting obsene. Warren Buffett's mutual fund has lost 1/3 of it's value, and is near a 2 year low. I am sick and tired of reading how we all need to follow this pied piper into the fire. He inheritted his starting wealth from his rich investment banker/congressman father, and made billions by executing a few good decisions. He also has been badly outperformed by a number of single stocks over the years, and has gotten CREAMED with this financial crisis, making ill-advised statements earlier (and even later, it would seem) this year. He is no oracle. He's not even a forecaster.

    I'll take Peter Schiff, Bill Fleckenstein, and Meredith Whitney ANY day over Buffett...

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