Warren Buffet is one the richest men in the world and one of the most successful investors in stock market history. But his life and investing style offer no guidance that is useful for investors.
It’s easy to see why people can be seduced by the idea of investing “like Warren Buffett.” Most of us have no hope of making money like Bill Gates because we cannot reinvent computing. We don’t have access to the oil wealth of a nation, like a Saudi prince or a Russian oligarch. We’re never going to become a monopolist robber baron. Even the fortunes of those hedge funders seem beyond reach since they so often involve buying things like derivatives that most of us cannot lay our hands on.
Warren, on the other hand, made his fortune by investing, something anyone in the world is capable of doing. He talks in folksy ways and lives a simple life. Supposedly, his investing style is based not on any big secret but just some things he picked up reading a very old book by a guy called Benjamin Graham. Even his style of investing, “value investing,” sounds like a wholesome and simple way to make a fortune.
It’s as if greed has had all the sin wrung out of it by rubbing it against the virtues of diligence and right judgment. If God didn’t like people who invest like Warren Buffett, why would He allow Warren to be so rich?
But this is an illusion and trying to invest like “Warren Buffett” is among the stupidest things anyone can do with their money. Buffett is a freakish outlier whose success no one can explain. Stock picking is a losing game for most people, whether over the long or short term. No amount of meticulous research will allow you to consistently outsmart the market.
And that’s the key to value investing. To invest like Warren you have to consistently outsmart the market, or at least outsmart the market to such a large degree that it overwhelms the times the market outsmarts you. This is what finding a stock that is “undervalued” means:
- that the market has made a mistake about the prospects of a company;
- that mistake is detectable by a hardworking working investor who does research;
- that the mistake, although detectable, hasn’t been detected and disseminated in a way that would effect the stock price;
- this combination of error and ignorance persists despite the huge fortune available to those who detect and correct it;
- this kind of mistake, detectability and widespread ignorance is common enough to form a lifetime investment strategy; and
- even the widespread knowledge of “value investing” hasn’t changed this situation.
It is vaguely possible that in Warren’s earliest days, this strategy was novel enough or wrongly discredited that it created opportunities. In a sense, “value investing” itself might have been an “undervalued” strategy. Adopting it was a version of “outsmarting” the market. So Warren’s first move was a kind of meta-investing strategy.
What’s more, stocks markets were less liquid, less transparent, and had a narrower investor base. Public companies were subject to less stringent disclosure rules and accounting practices were still developing.
All that has changed now. Warren Buffett’s success has made value investing famous. Markets are highly liquid, far more transparent, and subject to far more disclosure and sounder accounting rules. These days, it’s doubtful even Warren Buffett could start investing like Warren Buffett.
In short, investing like Warren Buffett is expensive. Actually, it’s far worse. It’s impossible. Attempts to do by ordinary investors are errors themselves. Lots of people in the market are very busy trying to exploit that very error.
Warren Buffet has consistently beaten the market with an annualized rate of return of around 22%. You cannot do this, especially not by mimicking what you think you know about Buffett’s strategy.
There are sound ways for you to invest. But “investing like Warren” isn’t one of them. In fact, anyone who tells you different is probably trying to scam you.
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