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We’re not like Buffett, but we can learn from him

More words have been written about Warren Buffett than any other investor in history. Why do we adore hearing about him so much? Is it his folksy nature? His man-of-the-people demeanour? His ability to make the world of investing seem less daunting? Or is it because his wealth has come from 'playing the share market', as any of us can now do with a decent internet connection and some spare cash or our own superannuation fund?

I believe the reason he is so idolised in Australia is our ability to relate to him as an individual. Maybe it's because he lives in an average house and drives an average car. Or maybe it’s because he doesn't sound like a normal 'finance guru'. Our affinity is further enhanced by our love of a punt, of placing a bet that might pay off big. Whatever the reason, Warren Buffett has a level of credibility most people in the public eye can only dream about, and will never obtain.

The thought of getting rich punting on the share market has great appeal, especially when compared to the work required to build wealth by putting sweat equity into our careers or businesses. We look at Buffett and think to ourselves, "He's a billionaire from punting the share market, and he has the ruffled looks and laconic nature of Granduncle Bill who left school aged 16. How hard can this share investing caper be?"

So just how different is Buffett from you, me and Granduncle Bill?

  • He started early. Warren Buffett’s dad owned a stockbroking firm. That helps. Young Warren is reputed to have bought his first shares aged eleven and was a seasoned investor by 15.  At 15, I was more interested in working on my cover drive than on covered call strategies.
  • He's seriously smart. Buffett obtained a Master of Science in Economics degree from the Ivy League Columbia University in 1951. His lecturers included Benjamin Graham and David Dodd, who would later collaborate on Security Analysis and the more approachable The Intelligent Investor, two investment texts treated with an almost holy reverence by advocates of value investing. Buffett is their star graduate. He is just as competent reviewing financial statements as he is using investment formulae to compound or discount money through time.
  • He started his investment operation essentially as a private fund structure which morphed into a public investment conglomerate only much later. His first investment vehicle, launched in 1956, was a limited partnership called, unsurprisingly, Buffett Partnership. This legal structure allowed Buffett, as General Partner, to pool the contributions of a small number of wealthy passive investors (Limited Partners) and invest on their behalf. More importantly this ‘sophisticated investor only’ structure meant he did not have to lodge portfolio position filings with the Securities & Exchange Commission in his early years.

Scrutiny of his decisions from the regulator and third parties was thus significantly lower than for retail mutual (managed) funds. This advantage, combined with his penchant for taking influencing stakes in companies, allowed Buffett to operate more like a private equity manager than a traditional share fund manager, particularly before Berkshire Hathaway became his investment vehicle of choice during the seventies. One cannot therefore compare Buffett’s track record with that of a typical mutual share fund, given the degrees of freedom Buffett has enjoyed that a normal manager would not be allowed. It’s akin to comparing apples with pineapples. Sounds similar, but very different in nature.

What can we learn from Buffett? Whilst we clearly can’t all invest like Warren Buffett, below are some behavioural clues as to what makes him so unique. Tuning into these may just make you a better investor.

Turn off the noise

If you can't help but take note of the latest market update to find out if you are richer or poorer than yesterday, you are most definitely not like Warren Buffett. The stream of finance news that now so pervades our daily lives Buffett would mostly regard as irrelevant noise. Part of his success comes from basing himself in Omaha, Nebraska and not on Wall Street, thereby removing himself from the global locus of investment noise. It’s the equivalent of Australia's richest share investor choosing to operate from Devonport, Tasmania.

Building financial security requires great self-control

Investing is saving dressed up in fancy attire. At its core is the deferment of immediate gratification for a (hoped for) higher level of gratification in the future. This deferment of pleasure is psychologically challenging, requiring a degree of emotional control that is hard for most to maintain. It is here that Buffett has us all covered. His self-control in living modestly and deferring consumption by reinvesting dividends is legendary, as is his investment horizon in being far beyond what most individual investors would consider the long term.

Five years is not the long term, try 15 for starters

Whilst we scrutinise the latest returns from our super fund, investment manager or share portfolio, Buffett looks at investment performance across multiple years, not quarters. Who has that kind of time to waste in building wealth, right? Well, Buffett is now 83. He did not become a household name (at least not in Australia) until well into his sixties. And he started his first investment partnership before he turned 28.

To paraphrase Buffett himself, by adopting a very long investment horizon he can more confidently treat the share market as a weighing machine that should, in time, correctly weigh its constituent companies by their true market worth, rather than as a talent show voting machine gyrating excitedly around the short term popularity of hot stocks or sectors. Few have his ascetic-like discipline when it comes to focussing on the distant future rather than the here-and-now.

Putting Warren Buffet’s long-term approach into perspective, when he started the Buffett Partnership, Menzies was in the Lodge, Eisenhower was in the White House and a man-made object had yet to orbit our planet. He is the antithesis of every get-rich-quick investment scheme spruiker you might ever come across.

So which of Buffett’s technical or personality characteristics could you genuinely incorporate into your investment decision-making process, given your unique blend of investment skills and behavioural traits?

 

Harry Chemay is a consultant to superannuation funds on issues relating to retirement. He was previously an Associate at Mercer and a Certified Financial Planner. 

 


 

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