10 things that make Buffett an elite investor. You will never learn to invest like Warren Buffett. The Oracle of Omaha is an investing superhero, endowed with a smattering of powers and advantages, each of…
10 things that make Buffett an elite investor.
You will never learn to invest like Warren Buffett. The Oracle of Omaha is an investing superhero, endowed with a smattering of powers and advantages, each of them potent in and of themselves, but when combined produce a once-in-a-century investor. But what exactly makes Buffett, the CEO of the world-famous holding company and financial conglomerate Berkshire Hathaway (NYSE: BRK.B, BRK.A), so special, specifically? Crazy as it may sound, there are nearly a dozen concrete, objective reasons Warren Buffett has been able to do the unimaginable — compounding capital at 20.9 percent annually for 53 years — that can be identified. These are the 10 things that allowed him to do it.
Practice makes perfect: nearly 80 years of study.
Warren Buffett bought his first stock when he was 11 — 77 years ago. First inspired by a book he borrowed at the local library at age 7, “One Thousand Ways to Make $1,000,” Buffett rarely considered much else other than growing the size of his bank account. By choosing a niche and sticking with it for a lifetime, Buffett’s depth of expertise in his chosen profession is practically unrivaled. As an adult, Buffett has been a voracious reader of financial material, once claiming to read 500 pages of 10-Ks (annual reports) a day. Want to invest like Buffett? This requirement weeds most people out immediately.
A legendary mentorship.
As if Buffett’s lifelong obsession with stocks weren’t already enough to separate him from the pack, he just so happened to directly encounter the father of value investing, Benjamin Graham, in his formative years. Graham taught this auspicious pupil at Columbia Business School — this was no accident, and in fact Buffett sought out Columbia because of Graham. The good professor was not just a fountain of knowledge but a legendarily successful investor in his own right, and the future billionaire both soaked up everything he could from Graham and begged to work for him, eventually earning that privilege in 1954.
The float: a constant source of investment capital.
The previous two points alone could go a long way in explaining why Buffett is an elite investor, and why the average (or even above-average) person has no chance at replicating Buffett’s success or approaching his level of talent. Sadly, the list doesn’t end there: Another reason you can’t hope to match The Oracle of Omaha is that Buffett created a way to invest vast sums of other people’s money. His holding company Berkshire Hathaway began acquiring insurers decades ago, using the “float,” or premiums collected but not yet paid out in claims, to do what Buffett does best: pick stocks.
Charlie Munger, devoted student of psychology and behavior.
What makes superheroes great? Usually, they have someone else — a sidekick, a family member, a friend, a significant other — that helps them stay on course. Buffett’s sidekick is Charlie Munger, a witty nonagenarian with an uncanny understanding of human behavior and psychology. Having closely studied issues like irrationality, incentives, impulsiveness and misjudgment, Munger is Buffett’s intellectual equal, and helps Berkshire’s CEO spot new investment opportunities, minimize risks and avoid mistakes. This has proved an invaluable perspective: some of Berkshire’s smartest long-term acquisitions — See’s Candy and Coca-Cola (KO) stock — were bought due to Buffett and Munger’s uncanny appreciation for strong brands and the pricing power they command.
It’s not the shoes, it’s the DNA.
Buffett began honing his skills as a child, feverishly building small businesses and reinvesting the profits. Using earnings from his job as a paperboy and other side hustles, he parlayed that money into used pinball machines, realizing the value of ownership at an early age. He also got an early lesson in the power of compound interest: as a 14-year-old he purchased a 40-acre farm with $1,200 of his savings. Buffett’s prodigal ways made him wealthy at a young age and molded him into an adult obsessed with investing. It wasn’t the shoes that made basketball star Michael Jordan great. It was the DNA — and the same is true with Buffett.
Buffett gets exclusive deals.
Pardon the tautology, but one reason Warren Buffett is the best investor in the world is because he’s the best investor in the world. The business community, both domestically and internationally, respects, knows and trusts Buffett, who has himself become a brand. Due to the prestige that rubs off on any company he invests in, The Oracle of Omaha was sought out repeatedly by blue-chip American companies during the 2008-2009 crisis and its aftermath. Goldman Sachs Group (GS), Dow Chemical Co. (DOW), and General Electric Co. (GE) all gave Buffett sweetheart deals in 2008 in exchange for Buffett’s liquidity and his vote of confidence. Bank of America Corp. (BAC) did the same in 2011.
Time horizon is (still) longer.
Thankfully, this is one of the few qualities of the great investor that any individual shareholder can choose to replicate: Buffett always takes the long view. Despite his old age, when Berkshire Hathaway bought the industrial goods company Precision Castparts for $37.2 billion in 2015, Buffett said: “We’re going to be in this business for the next 100 years.” Not caring about quarter-to-quarter results and short-term profits allows businesses to make long-term decisions while competitors can’t. This mindset has played a direct role in the ascendance of both Berkshire and Amazon.com (AMZN). The philosophy can be applied to investing too, where temporarily unloved stocks can offer great long-term returns.
Buffett turns off emotions.
The assumption that market participants are rational makes for elegant economic models, but it’s simply not true, and the fantastic performance of Berkshire Hathaway shares over time couldn’t have happened without widespread market irrationality. “Be fearful when others are greedy and greedy when others are fearful,” is one of Buffett’s most famous quotes, and his singular ability to live by those words may be Buffett’s most impressive and unique skill. Buffett’s nose for mania or unsubstantiated pessimism allows him to frequently buy low and sell high, a skill perhaps sharpened by the fact he stays far away from Wall Street, living in his hometown of Omaha, Nebraska.
Circle of confidence and margin of safety.
Anyone who hopes to invest like Buffett will need to master these two rules of thumb as well: not straying from your circle of confidence and giving all your investments a margin of safety. Both are core tenets of value investing, the discipline pioneered by Buffett’s mentor Benjamin Graham. The circle of confidence concept suggests investors should stick to businesses and industries they know well and understand. Buffett, until the 2010s, avoided the tech sector because of this. Applying a margin of safety simply means you should only buy a stock if it’s selling for a material discount to what you calculate its fair value to be.
A crisp, clear thinker.
Every year, Warren Buffett’s annual shareholder letter is arguably the most anticipated piece of writing from anyone on Wall Street. Jeff Bezos’ shareholder letters are also highly anticipated. Additionally, tens of thousands of people flock to Omaha for Berkshire’s shareholder meeting to hear Buffett and Munger recap Berkshire’s results, discuss the current economy, make predictions and give advice. Many attendees consider it an annual financial tune-up. Another legendary value investor, Peter Lynch, said “Never invest in any idea you can’t illustrate with a crayon.” It’s no coincidence that some of the world’s greatest investors are talented at taking complex ideas and breaking them down into simple, digestible parts.