The Myths Of Stocks For The Long Run – Part VI

Should You Invest Like Warren Buffett?

Whenever we discuss this issue of the fallacies to “buy and hold” investing, invariably there is the comment:

“Then why does Warren Buffett say that the ideal holding period is forever?”

First of all, we have the utmost respect for Warren Buffett. If investing had a “hall of fame,” Warren’s bust would be displayed in the front row along with Benjamin Graham. Through hard work, a grounded set of value principles, and great timing, he has been able to amass a great amount of wealth for himself and his shareholders.

Buffett’s specialty is value investing. That means buying stocks with long-term prospects that are believed (by a value investor) to be undervalued. The unloved underdog, for instance, which has been unfairly cast aside by Wall Street and whose value will be rediscovered in the future.

He articulated this approach succinctly in his 2008 letter to shareholders:

“Long ago, Ben Graham taught me that ‘Price is what you pay; value is what you get.’ Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.”

While there is often a rush in trying to justify “buy and hold” investing by selectively choosing quotes from Warren Buffett as noted above, Mr. Buffett’s most basic premise is that of active asset management:

“Be fearful when others are greedy and greedy when others are fearful.”

Or, as Baron Rothschild once quipped:

“Buy cheap, Sell dear.”

Not only is the most basic tenant of value investing, but it is the most basic premise of investing…period.

Like Buffett, as value-based portfolio managers ourselves, we also prefer extremely long holding periods. However, just because we “prefer” extremely long holding periods, things can and do change which can shorten that holding period immensely.

We also realize there are tremendous differences which we, and other “Buffett” disciples, cannot replicate. Yes, you can buy the same stocks as Buffett, but your outcome is going to be dramatically different from Berkshire Hathaway for several reasons.

There is an old joke that goes:

“The first step in investing like Warren Buffett: start with $1 billion…”

The joke, however, only begins to highlight the incredibly unique position Buffett enjoys in the investing world. Buffett is an anomaly; he is part private-equity deal broker, part investment bank, part Wall Street insider and part activist investor. He is also an investing icon, and as such, many investors copy his actions which lend price support to his investments.

Investors flock to Iowa for his annual shareholder meetings in hopes of glimmering information on how he is able to produce such great returns. Yet, no one has been able to come close to matching his track record. While many think Mr. Buffett has found the secret formula to investing – it is actually a combination of several “special” circumstances which have afforded Mr. Buffett his edge over the years.

Timing Is Everything – we have discussed through this entire series the importance of valuation analysis at the “beginning” of the investing journey. When you start your investing journey is one of the most important facets of long-term investing returns. While Buffett clearly bested the S&P 500 index over the years, he benefited greatly from the luck of catching the greatest bull market run in history in the 80’s and 90’s.

 

“Timing” and “good luck” are two of the most critical aspects of successful long-term investing. For Buffett, his timing could not have been better as a bulk of his outperformance in the early years came from his nimbleness to capture opportunities as the U.S. emerged from back-to-back recessions, low-valuations, high dividends and falling rates of inflation and interest rates.

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Disclosure: The information contained in this article should not be construed as financial or investment advice on any subject matter. Real Investment Advice is expressly disclaims all liability in ...

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