Warren Buffett is one of the greatest investors of our time, building a portfolio that topped $258 billion as of the end of the latest quarter. The billionaire's known for identifying quality companies and getting in on them when they're trading at reasonable, and sometimes even dirt cheap, levels. This strategy has worked, helping Buffett, as chairman, guide Berkshire Hathaway to a compound annual gain of more than 19% over 59 years. With this performance, Buffett beat the S&P 500 (^GSPC +0.80%), which delivered a 10.4% compound annual increase during that time period.
Considering this, it's perfectly logical that investors turn to Buffett for investing inspiration -- he's proven his expertise in the field. By tracking his buys, sells, and holdings, we surely can discover specific stocks to add to our portfolio, and understand when and why it may be a good idea to sell a particular player.
Looking at how often Buffett has outperformed the S&P 500 can tell us something important, too. Let's take a look at how often this investing giant has beaten the benchmark and what it means for your investing strategy today.
Image source: The Motley Fool.
Buffett's faith in the S&P 500
First, it's important to note that Buffett, though he's outperformed the S&P 500, is a fan of this index and thinks it's a great idea to bet on it as a whole. Buffett himself, in recent years, owned two funds that track the benchmark's performance -- the Vanguard S&P 500 ETF and the SPDR S&P 500 ETF Trust -- and even recommends that one of the best ways for the non-professional investor to succeed is to hold one of these funds. The S&P 500, since its inception as a 500-company index, has delivered an average annual return of 10% -- a pretty impressive track record.
But Buffett, as a savvy investor, also is known for his ability to pick a good stock and hold on to it throughout its growth story. This has supercharged his portfolio over the years.
The chart below shows how many times per decade Buffett's Berkshire Hathaway has outperformed the S&P 500. Each decade, Buffett beat the benchmark at least six years -- and during one period he even outperformed in eight out of 10 years. In total, he's topped the S&P 500 40 out of 60 years.
Now, let's consider how this relates to your investing strategy. It's important to note that Buffett's success over the years is due to holding on to stocks for the long term. He's spoken extensively on the subject, and one of my favorite quotes is the following:
"I never attempt to make money on the stock market," Buffett once said. "I buy on the assumption that they could close the market the next day and not reopen it for five years."
The key element
So, Buffett has generated his market-beating gains thanks to picking quality stocks, paying reasonable prices, and holding onto these players for many years. This long-term focus is key.
You could pick up a fantastic stock right now for a bargain, but it may not take off right away. In fact, it might even decline, and if you're impatient and sell, you could lose or at best end up breaking even. In another scenario, this recent buy may advance, and you might sell to lock in a profit. It's great that you won on the investment, but if the company has strong future prospects, your win could have been even bigger if you'd held on for a few years.
Of course, it's essential to choose the right stocks -- quality companies with competitive advantages and strong financial situations. But it can be difficult to gain even with these promising players if you shift in and out of them after a period of weeks or months. Buffett's frequent outperformances are linked to lengthy commitments to his stock picks -- and this focus on the long term could make a crucial difference in your investing strategy, too.
