Want to be like Warren Buffett? Choose Yourself
Everybody wants to be Warren Buffett.
I talk to would-be-Warrens all the time and see two or three ads a day advising me how to invest like Warren and what stocks Warren might buy today.
While that is a grand idea and I have stolen lots of ideas about investing from Warren and even more from his partner Charlie Munger over the years, I have also noticed that almost no one wants to do what Warren and Charlie have actually done to get rich.
When I talk to people that want to invest like Buffett I ask them how they plan to do that. The answers tend to focus on things like return on equity, buying great companies and holding on forever.
My favorite is the Warren wannabes who tell me they are going to look for companies that have a wide “moat.” Of them all, “moat” maybe the most overused word in the history of investing.
The number of companies with a true moat today is probably less than a dozen or so well entrenched moats built up over decades. They may indeed have a moat, but they are also huge companies that are unlikely to grow very fast in the future either.
The Real Story of Buffett’s Success
There are three big ideas that drive the success that Warren and Charlie have enjoyed over the years.
First, what I talked about yesterday that being the concept of buying good companies cheaply and holding them until they are excessively valued. That lies at the heart of how the two became billionaires in the first place.
The second big idea has to do with how the duo spends their time. Buffett was asked at Vanderbilt University in 2005 and has said that he spent 80-90% of his time reading. When asked what he read he mentioned newspapers, 10Ks and 10Qs as well as various industry publications.
Munger often jokes that his kids call him a book with legs because he spends so much time reading during the day. He has also said that he is aware of no successful person who does not read a lot.
That is something that James and I both embrace wholeheartedly. We both read an enormous amount of books, papers, articles and pretty much anything else we can get our hands on every day.
I read a lot more news than James does, I suspect, but he reads more technology and big picture stuff than I do. And we both start and end our day with reading.
[Back in 2015, James wrote an email titled Ten Reasons Reading Makes Your Life Better that I think everybody should read.]
I ran into someone I went to high school with a year or so ago and they were somewhat surprised that the moron they knew back then became who I am today. Books showed me that there is a better world than I imagined and they showed how to get from A to B.
Reading gave me the tools, information, and ideas I needed to have any measure of success in life and to this day the bulk of my time is spent reading in search of information and inspiration.
The third and probably most important reason Buffett and Munger are as wealthy as they are is that they hoard cash.
My favorite Munger quote is: “It takes character to sit there with all that cash and do nothing. I didn’t get to where I am by going after mediocre opportunities.”
Study the careers of the two, and it becomes evident that the secret sauce to Berkshire is that at every significant market bottom when the stock market decided to have a fire sale they had enormous amount of cash. They don’t use their cash to trade or buy stocks that might maybe be the next big thing. They hoard the cash and wait for an enormous opportunity.
In 2009 Munger took the $16 million of cash that had piled up on the books of The Daily Journal Corporation (DJCO) and invested in four stocks at the height of the panic today that portfolio is worth over $150 million. Buffett was investing in Bank of America and Goldman Sachs (GS) at bargain basement prices.
He bought Burlington Northern outright.
When everyone else was taking a beating and running scared they had cash to spend, and it has made them an enormous amount of money over the ensuing eight years. Track the cash balances of Berkshire over the past 50 years, and the value of cash in a crash becomes apparent.
Here again, this is something both James and I have talked about at great length.
Hoarding cash helps you sleep better at night and gives you the dry powder to take advantage of extraordinary opportunities.
Have your money invested in those companies we can find that represent extraordinary opportunities. Take advantage of income opportunities at discounted prices but always set a portion aside in plain old cash. Having cash when market collapse will make you rich so make sure you have the cash to move when the inevitable happens.
If you really want to invest like Buffett cut through all the funny little quotes and anecdotes.
Ignore the advice and interpretations from the hoard of disciples and would be clones.
Do what he did to get rich.
Buy good companies at great prices. Read so you can spot good companies and significant social and demographic trends that will drive earnings and stock prices higher. Hoard cash, so you are prepared to strike when extraordinary opportunities present themselves.
Written By Tim Melvin
As a 30-year veteran of the financial services and investment industry Tim Melvin served as a broker, advisor, and portfolio manager. He’s combined this nearly three decades of experience with a love of value investing in order to help investors worldwide to multiply profits and build their nest eggs. As an avid value investor, Tim...