As Clint Eastwood said in Magnum Force, “A man’s got to know his limitations”. Warren Buffett is perhaps the wealthiest and most famous investor of all time. Therefore many have tried to emulate him – including professional money managers – without much success. The fact is, very few could ever duplicate the process and the success he and his partner, Charlie Munger, have achieved at Berkshire Hathaway.
First, Buffett has over 75 years of investing experience, having bought his first stock at age 11. As well, except for a few hands of bridge with Bill Gates, he spends all of his time evaluating investments. His wealth and ownership of major corporations, gives him access to top executives and politicians. He can sit on the board of directors of companies he invests in and he is in a position to help them, if they get into trouble, by providing them with additional capital – on terms favourable to Berkshire.
Most of all, Buffett has the luxury of time, because he is so wealthy. He can afford to wait until a bargain comes along. Then he has the money available to act on the opportunity, including buying up whole companies. After the crash in 2008, he was able to acquire Burlington Northern Santa Fe Corporation while bailing out Goldman Sachs with preferred shares. Last year, he took advantage of the market sell-off in industrial stocks to acquire Precision Castparts for $37 billion.
Buffett made a large part of his wealth by being a value investor and having cash available when the severe bear market of 1973-74 provided many value opportunities for those with cash and the courage to act. But today, with computers and the Internet making financial data on every company instantly available to analysts, it is almost impossible to find the kind of value stocks that Buffett learned to invest in from his mentor, Benjamin Graham.
So you can see that today it would be almost impossible to follow in the footsteps of this famous investor. There may never be another Warren Buffett. But that does not mean we cannot learn valuable lessons from his approach. In fact, he and Munger love to share their investment experiences, both mistakes as well as successes.
For example, they only invest in businesses they understand. And these have to be large, well-established companies with excellent management. You could follow this approach. At Friedman Investment Group, we believe clients should understand the securities they own and we make the effort necessary to do our own research so we can answer your questions intelligently.
Buffett and Munger have said that “our favorite holding period is forever” – they buy and hold for the long term, adding to positions over time. Their long-term approach enables them to take market downturns in stride, looking at them as opportunities. Buffett follows Graham’s advice to “be fearful when others are greedy and greedy when others are fearful”. This is difficult for most people who are not professional investors, but it is easier if you understand what you own and have a long-term perspective.
Finally, it has served Buffett well to have cash available for opportunities, and there is regular cash flow coming in from Berkshire’s core insurance business and other investments. We can emulate this approach with diversified portfolios that have cash or bond positions for rebalancing into stocks at the appropriate time, and with income portfolios that generate regular monthly cash flow.
There are invaluable lessons to learn from successful investors like Warren Buffet, but it is also important to know yourself and your limitations. No one can duplicate Buffett’s success, but an experienced Investment Advisor can improve your chances of achieving your goals by helping you apply his wisdom in your own investment process.
Terry Fisher is an Investment Advisor with CIBC Wood Gundy in Toronto. The views of Terry Fisher do not necessarily reflect those of CIBC World Markets Inc. CIBC Wood Gundy is a division of CIBC World Markets Inc., a subsidiary of CIBC and a Member of the Canadian Investor Protection Fund and Investment Industry Regulatory Organization of Canada. If you are currently a CIBC Wood Gundy client, please contact your Investment Advisor.