Almost everyone has heard of Warren Buffett. The Oracle of Omaha! One of the greatest investors of all time! A wizard when it comes to both business and investing! By any stretch of the imagination, Warren Buffett is a singular and generational investing talent.
But many people get confused about Buffett’s #1 investing skill. Some people think it is his prodigious work ethic or monumental intellect. Others think it is his ability to “pick stocks” or identify super-successful investments. Still others might point out his business and management acumen, as he often locates and hires outstanding people who do a great job running businesses owned by Berkshire Hathaway (just ask any Berkshire shareholder about Ajit Jain).
However, in reality, Buffett’s greatest investing skill is something much more mundane. And it’s also something that we can all utilize very easily.
To be a successful investor, we don’t need to be the smartest person in the room, have access to the best hedge funds or private equity shops. We don’t need to know all the rich people in town so we can get access to the best investing “tips”. Because the most important skill of any investor is the proper use of time. It worked for Buffett and it can work for you too.
What the heck does that mean?
Let’s imagine a young lad named Warren. Warren is 7 years old and stumbles across a book at the library called One Thousand Ways to Make $1000, which described a variety of methods to start your own business. Warren internalized the lessons from the book and worked hard to earn and save money. Four years later, at the age of 11, Warren made his first stock purchase.
Today, young Warren is 91 years old. Eight decades later, he has amassed an enormous fortune and is widely considered to be the best investor that ever lived. Sure, Warren experienced a tremendous rate of return for his investments over time, and handily outperformed all of the major stock market indices, but time is the main ingredient for his success.
Here is an example. Imagine you have $10,000 to invest today and you invest in a plain ol’ index fund and earn a 7%/year rate of return. At the end of 80 years, your portfolio will grow to $2,242,344.
Now let’s imagine that you are a gifted investor and can outperform the market by 2%/year, so you earn 9%/year in total. If you have the same 80 time horizon, your portfolio will grow to $9,865,517. That’s way better.
But what happens if you don’t have the same amount of time. Well, take away 20 years and you only end up with $1,760,313 at 9%/year.
The lesson here is that although almost no one can outperform the market, almost anyone can be a great investor! All you need to do is stay disciplined and take advantage of time. This means, if you haven’t started investing, don’t wait. If you can help your kids get started on their investing journey, that’s all to the good. When it comes to investing, it’s important to get as greedy as possible when it comes to your time.
But wait, there’s more!
Here are a few other skills that Warren Buffett uses that we can all employ in our own journeys:
- Use a trusted advisor. It would be nice if we could all call Charlie Munger up for investing advice, but alas we can’t. But that doesn’t mean you can’t find someone (or a team of someones) to help you. Talk to a trusted family member or friend. Read and learn from high quality information sources. Or even consider working with a financial advisor (preferably one that charges a reasonable price). It’s helpful to bounce ideas off of people. They can provide a unique perspective that may have slipped your mind.
- Stay within your zone of competence. Buffett tends to avoid investments in companies that he cannot easily understand. And even though this has led him to miss out on some truly amazing investments (i.e. Intel, Google, etc.), his ability to remain focused on what he can understand, has allowed him to stay disciplined over the past 80 years. We can do the same by only investing in things we can easily understand. If you are looking at that variable annuity or cash value life insurance and the sales rep can’t easily explain how the contract works, move on to the next opportunity.
- Don’t overthink things. Warren Buffett knows a good business when he sees one. When a prospective seller contacts him, he can usually give an answer in short order. Buffett has also bought many businesses using simple, straightforward purchase contracts (just Google Nebraska Furniture Mart). So after you find a solid investment approach that works for you, stick with it and don’t try to over-optimize it. The reality is perfection is the enemy of good. So aim for “good” and go from there.
- Don’t be afraid to adapt. Buffett used to focus a lot of his investing efforts on “cigar butts” – companies that had fallen on tough times, but were so cheap that there was “one last puff” of value in them. In the days before the internet came along, you could often find companies that were trading for less than the value of their working capital or liquidation value. After some time, Munger convinced Buffett to shift focus instead on “great businesses at a fair price”. This allowed Berkshire to take advantage of a larger set of investment opportunities and put more capital to work, which ultimately allowed Berkshire to grow to the size that it is today.
So while Warren Buffett is often rightly touted as an investing super-Wizard, he still offers some important lessons for the rest of us. By using our time wisely, we can achieve some amazing results.
