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 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 (NYSE: GS  ) , and 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. 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  ) , Ingersoll-Rand (NYSE: IR  ) , WellPoint (NYSE: WLP  ) , 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 25,000 companies trading on the world's exchanges, there are just 1,991 currently capitalized at $3 billion or greater. That means Buffett's cash position effectively locks him out of 91% of all public companies.

Further, because Buffett has said he won't invest in technology stocks, he's out another 542 opportunities, including companies he reveres, such as Google.

This hurts
All in all, Buffett is restricted to a universe of some 1,449 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 $19 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 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 21 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.

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 Rule Breakers pick. Berkshire Hathaway is an Inside Value and a Stock Advisor recommendation. Coca-Cola and American Express are Inside Value recommendations. The Motley Fool owns shares of Berkshire and always discloses its disclosures in the disclosure policy.

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  • Report this Comment On September 26, 2008, at 2:26 PM, Sherman999 wrote:

    So what? Of course Warren is a better investor than everybody else. He's a statistical anomaly. If he didn't exist, somebody would have had to invent him. That doesn't mean we should worship him like a false God.

    God Bless Warren and every flaming liberal bone in his body. Even though I'll never achieve his greatness, I still get to make my own decisions in life. At least until Big Brother completely takes over our country in November.

  • Report this Comment On September 28, 2008, at 5:25 PM, tshk1221 wrote:

    Dear Sheman999,

    Do not critize the Oracle just because you have $500 in your bank account. In the future, actually, in every hour and minute of your miserable life, the poor gets poorer and the rich gets richer. You know why? The poor people have the tendency of witch hunting. You are thinking the Oracle is the witch. That means you want to attribute your being poor and miserable to the rich (witches). Poor people always say, "I'm not rich because the rich took away of all my money." You were poor, are poor and will be poor if you do not get over this 10,000 year-old human instinct of blaming others for your being poor and miserable. In this arcle, the Oracle said, "Hold for your life." Did you know that if you invested only $10,000 about 20 years in Wells Fargo Bank, that money will be worth over $2,000,000 now?. Yo, let's be honest. Don't you want to be rich and live a comfortable life after 30 years?? I want to be rich. I want to be like the Oracle. Let me give you some tips. Save $5,000 for the next one or two years. Buy Proctor & Gamble stocks and hold them for your life. You will regret so much after 30 years for all the money you wasted for cigarettes, coffee, drinks, beer and liquors. God has sent the Oracle to us to show us the path to wealth. Why don't just listen to him once, believe him and follow his path? Don't ever, ever be like one of the stupid multitudes of people standing in front of WAMU to take out the miserable $1,000 cash from their accounts to protect it. God, please teach these ignorant and innocent US citizens!

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