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Why you can’t invest like Warren Buffett

by | Feb 26, 2014 | SELF-PUBLISHED

And why you should follow his advice anyway

Warren Buffett is the most famous investor in the world. Also one of the world’s richest men. There’s a direct line of causality between the two. So it’s not surprising that his annual letter to shareholders of his investment company, Berkshire Hathaway Inc., typically makes front-page news. Its folksy investment wisdom and amusing personal anecdotes make for better reading than most business news and commentary of the day. So why doesn’t everyone invest like Buffett? Simple: You can’t. But you can and should follow his advice for small investors. Here’s why.

Let me qualify that just a little. When I say “you can’t invest like Warren Buffett,” I mean that the very large majority of us can’t. Mr. Buffett, remember, has been living and breathing investing and investments all his life. He is now 83 years old, and he founded his first investment partnership in 1956 at the age of 26. In a decade he had become a multi-millionaire. In the late 1960s, he acquired floundering men’s shirt manufacturer Berkshire Hathaway Inc., turned it into an investment holding company, and the rest is history. His hero is Benjamin Graham, the father of modern value investing, and Buffett quotes Graham at the top of this year’s letter to investors.

Do you know Benjamin Graham?

So here’s reason number one: If you don’t know who Benjamin Graham is, never read, studied, and memorized Graham’s book, The Intelligent Investor, and never intend to, you will never invest like Warren Buffett. Even then, unless you are able to look at the last 10 years of a company’s balance sheets and income statements, and assess in your head whether the company would make a good investment, you will never invest like Warren Buffett.

These days, of course, Mr. Buffett’s investment challenges occur on a very large scale. He and his partners buy entire businesses for billions of dollars, including food companies (H.J. Heinz), railroads (Burlington Northern Santa Fe), energy (MidAmerican Energy), insurance (GEICO, General Re), and invest large chunks of capital in numerous other businesses.

Buffett and his partners and managers still use the same criteria for buying stocks as they do for buying entire businesses. “We first have to decide whether we can sensibly estimate an earnings range for five years or more,” he writes in his most recent letter. “If the answer is yes, we will buy the stock (or business) if it sells at a reasonable price in relation to the bottom boundary of our estimate. If however, we lack the ability to estimate future earnings – which is usually the case – we simply move on to other prospects.” You can be sure they don’t throw darts when they do their analysis. He adds that they have never foregone an investment based on the macroeconomic or political environment or the views of other people. Unless you can do this, you will never invest like Warren Buffett.

No magic shortcuts to investing

I think you get the point by now. Investing in stocks – and making money – isn’t easy. Investing in stocks the way Warren Buffett does is immensely difficult. And no recitation of “5 golden rules” or “10 steps to investing the Warren Buffett way,” or anything else you may read in the daily financial press will make it any easier.

While most of us don’t have the necessary discipline, experience, and business acumen to “invest like Warren Buffett,” we can use the commonsense advice he’s dispensed over the years and apply it to our own portfolio planning.

Know the difference between investing and speculating – and understand where your comfort level lies. Buffett emphasizes investing for the productivity of the asset, which can be measured, rather than its potential price change, which can’t. For us ordinary investors, this means understanding your own tolerance for risk, and investing accordingly.

Invest for the long term. Buffett has famously said that his favorite holding period for an investment is “forever.” While not always true, even in his case, this maxim goes to the principle of setting long-term goals, allocating assets to meet those goals, and then sticking with the plan. It’s only over the longer term that productive assets will reveal their true value.

Tune out the noise. The daily tide of economic, investment, and business news and predictions can be a huge distraction to achieving your longer-term goals, especially if you start making investment decisions based on them. Buffett writes that indeed “it is dangerous because it may blur your visions of the facts that are truly important.”

Good advice is crucial

For those of us who are reconciled to the fact that we are not Warren Buffett – and never will be – getting the right kind of financial planning and investment advice is crucial. The kind of counsel that is cool, objective, balanced, and highly disciplined – something that Warren Buffet might approve of.

© 2014 by Robyn K. Thompson. All rights reserved. Reproduction without permission is prohibited.

© 2021 by Robyn K. Thompson. All rights reserved. Reproduction without permission is prohibited. This article is for information only and is not intended as personal investment or financial advice.

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