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Investors: Staying True to Yourself Isn't Always Easy

By Taylor Muckerman - Apr 19, 2016 at 7:11PM

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Why emulating Buffett may be the key to your investing success.

One defining trait of successful investors is their ability to simply stay the course.

"The reason Buffett is successful is not because he has a magic stock wand, but rather his unbelievable ability to stick to his style."
--Mebane Faber

It may not come as any surprise that chronically second-guessing ourselves has been shown to have negative effects on our mental health. But what about our monetary wealth?

Historically, the S&P 500 has delivered a positive annual return 70% of the time. Sounds great, right?

Unfortunately, it tends to be the remaining 30% that causes investors to wonder where we went wrong. Psychologists call this a "negativity bias." Humans simply tend to anchor on the negative more than the positive.

When thinking about these ebbs and flows of investing, it's easy to understand why we may have a variety of voices in our head pulling our thoughts in multiple directions. As it turns out, the ability to tune out said voices may be the key to success for one of the world's greatest investors -- Warren Buffett.

Mebane Faber, cofounder and chief investment officer of Cambria Investment Management, recently analyzed the annual returns of the top 10 holdings of Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) since 2000. What he found was that they underperformed the index in nine of the 16 years in question.

Yes, Warren Buffett's top 10 investments have underperformed the broad market in more than half of the years of the new millennium. Clearly, he's lost his touch, right?


Sure, Buffett's top 10 may have lost an inning or nine, but if you take all 16 years in aggregate, they turned $10,000 into right around $40,000. You'd take a 300% return in 16 years, right?

So how did that Buffett-beating index do? Well, it lost -- and not by just a little bit, either. It would have not quite doubled your original $10,000, falling short of Berkshire's return by more than $20,000.

How'd he arrive at that impressive outperformance? He stuck to his guns.

In 2000, Berkshire's largest five holdings included American Express, Coca-Cola, Gillette (now Proctor & Gamble), The Washington Post Co., and Wells Fargo. Turning the page to February 2016, Berkshire's largest 10 holdings still included all but The Washington Post Co (now Graham Holdings). A big reason for this is that Warren Buffett essentially traded 1.6 million shares of Graham Holdings for a wholly owned subsidiary of Graham Holdings, which included a Miami-based television station.

Several acquisitions during that time made up the remainder of Buffett's top 10. It hasn't necessarily evolved because of divestitures like the portfolios of many individual investors. To put it simply, he lets his winners do just that -- win. Unfortunately, we mere mortals often do the opposite, succumbing to the "disposition effect," selling our winners and holding on to losers.

Here at The Motley Fool, we try to emulate Buffett by emphasizing buying more of your winners instead of selling them. After all, they must be winning for a reason, right? Unfortunately, that's not always easy.

To this point, my fellow colleague Jason Moser offered up his thoughts on a recent Million Dollar Portfolio podcast: "Adding to your winners is not the easiest thing to do if you've never done it before, but the more you do it, the easier it gets is what I found personally. I think that we will do more of that as we see a number of our winners pan out here."

Apparently, Uncle Warren has become quite accustomed to this habit. I know I've personally been working on it.

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