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 last year, 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 (NYSE: BRK-B  ) 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 contribute $5 billion to Goldman Sachs (NYSE: GS  ) and get 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. 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 American Express (NYSE: AXP  ) , Coca-Cola (NYSE: KO  ) , GlaxoSmithKline (NYSE: GSK  ) and Procter & Gamble (NYSE: PG  ) .

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 28,000 companies trading on the world's exchanges, there are just 1,566 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 255 opportunities, including companies he reveres, such as Google.

This hurts
All in all, Buffett is restricted to a universe of some 1,341 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 take advantage of recent ridiculously cheap opportunities in the micro-cap sector ... such as $14 million SmartPros, which is trading at a 3.7 enterprise value/FCF ratio.

But because SmartPros is so small, Buffett probably doesn’t even know about it. Heck, because SmartPros is so small, you probably didn't know about it, either.

Friends in high places
As for an informational advantage, yes, Buffett has connections. But when he bought a big stake in PetroChina (NYSE: PTR  ) , 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 our subscribers.

If you'd like to learn what companies we're recommending for new money, click here to join Hidden Gems free for 30 days.

Already subscribe to Hidden Gems? Log in at the top of this page.

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. Google is a Motley Fool Rule Breakers pick. Berkshire Hathaway is an Inside Value and a Stock Advisor recommendation. Coca-Cola and American Express are Inside Value recommendations. Coca-Cola and Procter & Gamble are Income Investor choices, while GlaxoSmithKline is a former one. The Motley Fool owns shares of Berkshire and American Express and always discloses its disclosures in the disclosure policy.


Read/Post Comments (6) | Recommend This Article (12)

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 May 06, 2009, at 9:09 AM, catoismymotor wrote:

    Tim and Brian,

    I find myself confused about SmartPros. I researched it on Fool.com, found that the ticker symbol is PED. When I decided to take a look at it using Yahoo! Finance PED gave me Petroflow Energy Ltd. It appears to have a similar cap size and the same current share price of $1.03 as Smart Pros. Help! My office is out of coffee, can't think without it! Have I made an error somewhere?

    Appreciatley yours without caffeine,

    Cato

  • Report this Comment On May 06, 2009, at 9:23 AM, catoismymotor wrote:

    Appreciatley = Appreciatively

    I told you we are out of coffee, right?

  • Report this Comment On May 06, 2009, at 9:38 AM, TMFMmbop wrote:

    Hey, Cato.

    SmartPros changed its ticker a little while back to SPRO when it switched from the AMEX to the Nasdaq. You can find the quote here: http://finance.yahoo.com/q?s=spro.

    Tim

  • Report this Comment On May 06, 2009, at 9:51 AM, catoismymotor wrote:

    Tim,

    Thank you for helping me through my post Cinco de Mayo, caffeine deficient morning. Gracias for the lead.

    Cato

  • Report this Comment On May 06, 2009, at 11:20 AM, foolasia wrote:

    At Berkshire's Annual gathering, wasn't buffet/munger quoted saying that they admires Google's moat and network effect? He's rarely given to hype stocks...maybe for WFC...but that statement sounds like a strong recommendation for Google.

  • Report this Comment On May 06, 2009, at 11:32 AM, TMFKris wrote:

    foolasia: Our "Warren Buffett on Google" story just got posted. http://www.fool.com/investing/general/2009/05/06/warren-buff...

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