Warren Buffett Is a Better Investor Than You & Why Buffett is smarter than you

Warren Buffett Is a Better Investor Than You

By Tim Hanson and Brian Richards
June 26, 2008

The headline here isn't newsworthy. We know Warren Buffett is a better investor than the rest of us. His incredible long-term track record at Berkshire Hathaway (NYSE: BRK-A), and his avoidance of both the 2000 tech meltdown and the current subprime crisis, prove that.

The question is: Why?

And, perhaps, "how?"
There's one person in this world well-equipped to answer that question: Buffett's longtime friend and business partner Charlie Munger. Happily for us, Charlie likes to talk -- and he addressed this very question last year.

Munger's remarks at 2007’s Wesco Financial annual meeting are wide-ranging and worth reading in their entirety. But boiled down, Munger gave seven reasons why Buffett is a better investor than you:

>He's smart, and he puts his intelligence to good use.
>He has an unflagging interest in investing.
>He started learning about investing early on, when he was 10.
>He's a "good learning machine," and he keeps on learning.
>He has enormous experience in the subject and practices daily.
>He's been rewarded for being a good investor.
>He's objective.

If there's a common thread tying these factors together, it's that Buffett, who does happen to be smart, found something he liked and has worked at it every day for a very long time. So if you want to be like Buffett -- though you may never approach his $62 billion fortune -- start now, practice investing daily, and be objective in your decision-making.

1-2-3, go
This is easier said than done. Perhaps you have a day job; perhaps you're already 76 (Buffett's age); perhaps you consider yourself not very smart. Whatever the problem, there are reasons why most of us will never be exactly like Buffett.

We will all, however, be much better investors -- and make a lot more money in the process -- if we learn to emulate him just a little bit.

Two ways to be like Buffett
One of the ways Buffett learns so much is through reading. Munger told his audience last year, "If you had an observer ... he would find that Warren spent most of his time sitting on his [rear end] and reading." He advised further, "If you want to succeed, if you really want to be the outlier in terms of achievement, just sit down on your [rear end] and read -- and do it all the time."

In a recent Fortune interview, Buffett spoke to how he generates ideas: "I just read. I read all day. I mean, we put $500 million in PetroChina. All I did was read the annual report."

So the first way to be like Buffett is to make some time to read, and read as much as you can.

The second: Start now. Though you may never get to Buffett's 66 (and growing) years of experience, you can certainly gain more experience than you have now. If you have kids, get them started now.

And one way to invest like Buffett
Avid reading and an early start will go a long way toward helping you be like Buffett. But to prosper financially, you'll also need to know how to invest like Buffett.

Buffett has amassed a fortune in the stock market not by momentum investing or day trading, but by focusing on living, breathing businesses. He gets to know them and -- more importantly -- gets to know what he'd pay to own them. Then he waits until they fall into that attractive price range.

Some of these picks -- like CarMax (NYSE: KMX) and Moody’s (NYSE: MCO) -- will get cheap because they face difficult operating environments. Others -- like Burlington Northern (NYSE: BNI) -- will look cheap because Buffett thinks they can grow more quickly than the market thinks they can. In either scenario, Buffett is focused on the quality of the company and not its external circumstances. He told Fortune recently, "I don't invest a dime based on macro forecasts."

Why macro forecasts don't work
See, your returns in the stock market don't necessarily depend on how well your company does, but rather on how well your company does relative to the price you paid for it. As Wharton professor Jeremy Siegel has written, "The basic principle of investor return ... states that the long-term return of a stock depends not on the actual growth of its earnings but on how those earnings compare to what investors expected."

Consider that Altria has returned more than 250% since 1998, even though cigarette sales in the U.S. have fallen more than 20% over that same time frame. Then consider that while the Internet exceeded almost all late-'90s forecasts, McAfee (NYSE: MFE) and Nortel Networks (NYSE: NT) each have negative trailing-10-year returns.

Problem is, 10 years ago, tech stocks had those macro forecasts priced in. (You could make the case that alternative-energy stocks are the same way today.) A sweeping trend does not make an investment thesis -- or, at least, not a complete one. Because prices are just as important as prospects.

And that concludes our article
That's not only why Warren Buffett is a better investor than you, but it also informs the way Fool co-founders David and Tom Gardner invest at Motley Fool Stock Advisor. And to good success so far: Our picks are ahead of the S&P 500 by nearly 40 percentage points on average.



Why Buffett is smarter than you
The billionaire businessman’s patience, discipline and willingness to act when others won't are what make him a superior investor.

By The Motley Fool

At 77, Warren Buffett is no spring chicken. The fact is, most people his age are looking to get money out of the market rather than put money into it.

Yet Buffett is continuing his life's work in the same way he always has.

See, in helping privately held Mars buy Wm. Wrigley Jr. (WWY, news, msgs) a couple of months back, the billionaire investor and chairman and chief executive of Berkshire Hathaway (BRK.A, news, msgs) made a deal with zero liquidity in sight. That's precisely the opposite of what you'd expect from virtually all investors in private companies (particularly venture capitalists), who demand a clear path to liquidity from the start.

The Oracle of Omaha has long preached that the long term is the only view for an investment -- even if the investor is beyond retirement age. He's said before that his ideal holding period is "forever" -- and the Mars-Wrigley-Berkshire deal is yet another example of Buffett putting that theory into practice.

Yet most investors have not learned this lesson. The average holding period for a stock is less than one year, according to recent data from the New York Stock Exchange.

Buffett's patience, discipline and willingness to act when others won't make him a better investor than you are.

Those aren't his only advantages, though. Not long ago, we wrote an article highlighting the reasons Buffett is a superior investor. It seemed like a truism to us -- the man has built one of history's great fortunes on the power of his investing acumen, after all. But some readers took offense.

We got e-mails telling us that Buffett has tons of advantages over the common man, ranging from his enormous cash war chest to his access to executives and other privileged sources of information. While it’s true that few other investors could have contributed $3 billion to Dow Chemical's (DOW, news, msgs) recent buyout of Rohm and Haas (ROH, news, msgs), having lots of cash isn't necessarily the advantage many readers made it out to be.

Buffett's enormous cash position is actually a huge disadvantage when it comes to earning exceptional stock-market returns. It essentially prevents him from investing in anything other than liquid large caps.

Just glance at Berkshire Hathaway's Form 13F filing, and while you'd also recently find tiny liquidation play Comdisco Holdings, you'll predominantly find multibillion-dollar companies such as Bank of America (BAC, news, msgs), Home Depot (HD, news, msgs), NRG Energy (NRG, news, msgs) and SunTrust Banks (STI, news, msgs).

While those are solid companies, their size illustrates how small a pond Buffett generally fishes in (Comdisco is a shocking exception). According to Capital IQ, while there are more than 25,000 companies trading on the world's stock exchanges, there are just 2,130 capitalized at $3 billion or greater. That means Buffett's cash position effectively locks him out of 91% of public companies.

Further, because Buffett has said he won't invest in technology stocks, he's out another 585 opportunities, including companies he reveres, such as Google (GOOG, news, msgs).

Becky Quick of CNBC traveled to Omaha, Neb., to interview the Berkshire Hathaway chief on Aug. 22. Topics included the Fed, Fannie and Freddie, and why he supports Barack Obama.All in all, Buffett is restricted to a universe of some 1,545 stocks -- which is far from ideal. In fact, Buffett has said that he could earn 50% annual returns each and every year if he if he had just $1 million to invest, because it would give him free rein in the market.

With just $1 million or less, Buffett could have taken advantage of recent ridiculously cheap opportunities in the micro-cap sector, such as when $19 million SmartPros (SPRO, news, msgs)traded at an absurd 1.7 enterprise-value-to-free-cash-flow ratio.

But because SmartPros is so small, Buffett never bothered with it. Heck, because SmartPros is so small, you probably didn't bother with it.

The exact same information
As for an informational advantage, yes, Buffett has connections. But when he bought a big stake in PetroChina (PTR, news, msgs), he admitted the only research he'd done was to read its annual reports. In other words, he acted on the exact same information available to all of us, and the producer of two-thirds of China’s oil and gas tripled during the time Berkshire owned it.

This brings us full circle. It isn't anything artificial that makes Buffett a better investor than you; it's his patience, discipline and willingness to act when others won't.

Buffett's abilities did not develop overnight. It's been a lifelong process -- one that he began at age 11. So while he may be a better investor than we are today, we can at least learn from his experiences and -- like he did -- become superior investors over time. That means:

Buying for life (or, at least, the long term).
Buying small (perhaps our lone advantage).
Buying based on thorough research and due diligence.