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-A  ) 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 $3 billion to General Electric (NYSE: GE  ) 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 Comcast (Nasdaq: CMCSA  ) , Lowe's (NYSE: LOW  ) , Kraft (NYSE: KFT  ) , and UPS (NYSE: UPS  ) .

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 (a division of Standard & Poor's), while there are more than 28,000 companies trading on the world's exchanges, there are just 1,712 currently capitalized at $3 billion or greater. That means Buffett's cash position effectively locks him out of 95% of all public companies.

Furthermore, because Buffett has said he won't invest in technology stocks, he's out another 237 opportunities, including companies he reveres, such as Google.

This hurts
In all, Buffett is restricted to a universe of some 1,475 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 microcap sector ... such as $14 million SmartPros (Nasdaq: SPRO  ) , which is trading at a 2.9 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, 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 recommendations. UPS is an Income Investor selection and Kraft is a former one. The Motley Fool owns shares of Berkshire and always discloses its disclosures in the disclosure policy.


Read/Post Comments (6) | Recommend This Article (14)

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 June 06, 2009, at 8:51 AM, jc09058 wrote:

    I concur completely with this assessment. The long view really is the only way to go and I base that on my own experience. I'm not playing with billions or even millions of dollars, I'm just an average long-term investor. Even as bad as this last and current year has been for me in some areas, I'm still holding an average 52% lifetime earnings increase on all of my investments by taking the long view.

  • Report this Comment On June 07, 2009, at 12:50 PM, devtal wrote:

    I keep reading on this post how to invest like WB. The best way is to buy BRK-B. What is so hard about that?

  • Report this Comment On June 08, 2009, at 3:08 PM, Ironbob wrote:

    Blah, blah, blah. To be honest, I'll be glad when the old coot is pushing up daisies. I've grown so sick of the phony rags-to-riches story this bozo tries to foist on the American public. The truth is his damn daddy was a Congressman. Seems that always gets left out of the equation.

    The dude has had someone around to help him grease palms since he was a kid. Daddy was always there to get him into the best schools and help him get good jobs so please enough with the "Warren Buffett is a better investor then you" BS because quite frankly it's insulting.

    Cottled by millionaires, propped up by his daddy and given every avenue anyone could ever be given prior to his success this old fart needs to shut up and go die on some deserted island.

  • Report this Comment On June 08, 2009, at 3:55 PM, munsterhall wrote:

    So Ironbob, how much did you loose by buying BH stock? Bitter comment is worse than no comment

  • Report this Comment On June 11, 2009, at 3:29 PM, JavaSanson wrote:

    Ironbob, do you really need to be so disrespectful ("I'll be glad when the old coot is pushing up daisies","this old fart needs to shut up and go die on some deserted island.")? Did Warren Buffett cause you extreme hardship?

    He might have had help along the way, but that's usually the case for most successful people. I recommend to you (and to anybody) the book "Outliers", which talks about the true nature of success (recommended by Charly Munger, Buffett's partner, which will probably make you disregard this book).

    Success really is based on some advantages, but as you and I both know, not everybody who has had help has turned out to be successful. It still takes an incredible amount of time and effort to make the advantage pay off.

  • Report this Comment On June 18, 2009, at 11:48 PM, wannainvestsmart wrote:

    This article is good and the advices are useful. There is only one point I don't particularly agree with.

    "1 Buying for life (or, at least, the long term)."

    The problem with Buffett is that he is managing so much money that he has to automatically rule out 95% of companies. That is the main reason he has to buy company for the long term or for life, b/c if the company doesn't work out... he doesn't have many alternatives.

    In fact, Buffett said that in a 1998 interview with Adam Smith:

    "We don't like to disturb holdings in great businesses.

    But when I started in this business I had way more ideas than money, so I had to sell things. Every time I'd get a new idea I'd get all excited and then I'd check my bank account and I didn't have any money. So I had to sell something."

    (from http://www.adamsmith.net/transcripts/05_15_98.html)

    Buffett does sell, but his investing style had to change b/c he managed more money. And both in absolute and relative level, he is still kicking everyone's butt (maybe not George Soros, who averaged 30% return vs. Buffett's 20%, but he has invested only 30 years vs. Buffett's 40. He also managed less money than Buffett)

    To further prove my point, Buffett did say that pure Graham value investing method is good for small sum, and Phil Fisher's "buy good company" approach is good for large sum.

    (from http://www.fatpitchfinancials.com/556/warren-buffett-respond...

    For small investors like us, if one company doesn't work out, we can move onto other good companies. I don't encourage trading stocks, but I don't particularly think blindly holding stock for a long time either.

    Here is probably what I would suggest regarding when to sell a stock.

    http://www.fool.com/investing/general/2009/06/18/4-reasons-t...

    enjoy!

    Alex Wong

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 915227, ~/Articles/ArticleHandler.aspx, 9/21/2014 12:21:34 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 1 day ago Sponsored by:
DOW 17,279.74 13.75 0.08%
S&P 500 2,010.40 -0.96 -0.05%
NASD 4,579.79 -13.64 -0.30%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/19/2014 4:03 PM
BRK-A $212000.00 Down -75.05 -0.04%
Berkshire Hathaway… CAPS Rating: ****
CMCSA $56.74 Down -0.11 -0.19%
Comcast Corp CAPS Rating: ***
GE $26.29 Up +0.08 +0.31%
General Electric C… CAPS Rating: ****
KRFT $56.91 Down -0.53 -0.92%
Kraft Foods, Inc. CAPS Rating: ****
UPS $99.44 Down -0.19 -0.19%
United Parcel Serv… CAPS Rating: ****

Advertisement