Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 33

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. 

 


 

Leave a Comment:

RELATED ARTICLES

What do fund managers mean by Quality Investing?

A fortune built on defying the pull of theory

Behavioural reasons why we ignore life annuities

banner

Most viewed in recent weeks

Vale Graham Hand

It’s with heavy hearts that we announce Firstlinks’ co-founder and former Managing Editor, Graham Hand, has died aged 66. Graham was a legendary figure in the finance industry and here are three tributes to him.

Warren Buffett is preparing for a bear market. Should you?

Berkshire Hathaway’s third quarter earnings update reveals Buffett is selling stocks and building record cash reserves. Here’s a look at his track record in calling market tops and whether you should follow his lead and dial down risk.

Welcome to Firstlinks Edition 583 with weekend update

Investing guru Howard Marks says he had two epiphanies while visiting Australia recently: the two major asset classes aren’t what you think they are, and one key decision matters above all else when building portfolios.

  • 24 October 2024

A big win for bank customers against scammers

A recent ruling from The Australian Financial Complaints Authority may herald a new era for financial scams. For the first time, a bank is being forced to reimburse a customer for the amount they were scammed.

The gentle art of death cleaning

Most of us don't want to think about death. But there is a compelling reason why we do need to plan ahead, and that's because leaving our loved ones with a mess - financial or otherwise - is not how we want them to remember us.

Why has nothing worked to fix Australia's housing mess?

Why has a succession of inquiries and reports, along with a plethora of academic papers, not led to effective action to improve housing affordability? Because the work has been aimless and unsupported by a national consensus.

Latest Updates

90% of housing is unaffordable for average Australians

A new report shows that only 10% of the housing market is genuinely affordable for the median income family, and that drops to 0% for those on low incomes. This may be positive for the apartment market though.

Taxpayers betrayed by Future Fund debacle

The Future Fund's original purpose was to meet the unfunded liabilities of Commonwealth defined benefit schemes. These liabilities have ballooned to an estimated $290 billion and taxpayers continue to be treated like fools.

Property

The net benefit of living in Australia’s cities has fallen dramatically

Rising urban housing costs in Australia are outpacing wage growth, particularly in cities like Sydney and Melbourne. This is leading to an exodus of workers, especially in their 30s, from cities to regions. 

Shares

Fending off short sellers and gaining conviction in a stock

Taking the path less travelled led to a remarkable return from this small-cap. Here is the inside track on how our investment unfolded, and why we don't think the story has finished yet.

Planning

The nuts and bolts of testamentary trusts

Unlike family trusts, testamentary trusts are activated posthumously, empowering you to exert post-death control over your assets. Learn how testamentary trusts offer unique benefits and protective measures.

Investing

The US market outlook is more nuanced than it seems

Investors are getting back to business after a tumultuous election year. Weighing up the fundamentals is complicated, however, by policy crosscurrents that splinter the outlook in several industries.

Investing

Book and podcast recommendations for the summer

Dive into these recommendations for your summer reading and listening. Uncover the genius behind a secretive hedge fund, debunk healthcare myths, and explore the Cuban Missile Crisis in gripping detail.

Sponsors

Alliances

© 2024 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.