What is Warren Buffett's investment secret? Almost every investor wants to know this question, but few can answer it. Personally, I would not claim to be an expert on Buffett, but I have done a lot of research and written about his past, but there are still people who have delved deeper than me.
Although other writers have more comprehensive analysis of Buffett's strategies, I was able to simplify some points for the general reader to understand and gain insight into how this billionaire has built his wealth over the past few decades.
1. Iron Will
Buffett is a great stock picker; this is also the reason for his success over the years. If Buffett lacked these key investments, he would not have achieved the wealth he has today. Buying American Express (AXP), Coca-Cola (KO), and GEICO made Buffett a genius in the eyes of many people, and these are still his most important investments. Another thing worth knowing is that Buffett didn't make most of his wealth until after his 60th birthday, which came primarily from buying shares of American Express, Coca-Cola, and GEICO (some of which was created through reinvesting cash).
You can simply view Buffett as a stock picker whose success no one will ever be able to replicate, which is true to a certain extent. Or you can argue that the best way to replicate Buffett's performance is to buy and hold stocks similar to his, which will work to a certain extent (although you shouldn't blindly follow an investment guru without doing your own due diligence on the stocks). However, there is one major difference between Buffett and the average investor, and this is the main reason most investors will never be able to replicate his success.
2. Patience and Time
Patience and time are two of Buffett's main strengths. Most investors don't have these traits, which is why most investors will never be able to replicate Buffett's performance. Buffett holds for a long time and patiently waits to buy at the bottom when the stock market declines the most and most investors flee the stock market crash.
During times of market turmoil, you need discipline to weather the storm of a falling stock market. Take American Express, for example. During the financial crisis, the stock price plummeted from a high of $63 in 2007 to a low of $10. How many investors could withstand such a dramatic price drop? But by 2014, American Express rebounded to $95. Those who continued to hold the stock deserved to be rewarded for the spread, but I doubt that only a few people could do this.
3. Avoid short-termism
In 2007, Dow Publishing released a research report written by Chief Investment Officer Clifford G. Dow that focused on the portfolio turnover of mutual funds. This is different from other turnover data. The report focuses on the performance of mutual funds, so its data excludes the impact of short-term market traders.
The report highlights a 1998 study of 435 mutual funds in Morningstar's "large growth" fund category that showed an average turnover rate of 93% (average holding period of 12.9 months). Over the 10-year period from 1989 to 1998, mid- and small-cap growth funds had an average turnover rate of 114% (10.5 months). Active mutual funds had turnover rates ranging from 215% to 972%, with an average of 320%, meaning that the average holding period for these funds was 24 weeks, 5 weeks, and 16 weeks.
Other non-mutual fund data show that the average holding period for stocks has dropped from 8 years in 1962 to 5 days in 2012. And the Vanguard Group chart shows that holding periods for stocks dropped sharply from 1990 to 2000, before frequent trading began to take over Wall Street.
"A few years ago, redemptions were 10% per year, which equated to a 10-year holding period," said Jack Brennan, CEO of the Vanguard Group and chairman of the Investment Company Institute (ICI). "Now, redemptions are closer to 40%, which means the average holding period has dropped to about 2.5 years." Conclusion
The fact is that if the average investor can't hold an index fund or a single stock for more than a few years, they will never be able to replicate Buffett's performance. Even if you are the best stock picker in the world, buying and selling stocks every three years will greatly reduce the chances of creating huge wealth in the long run. Extending your holding period requires patience.
Buying and holding index funds is easy; you can earn an annualized return of 9% with almost no effort. There is no need to spend time researching or picking stocks. But the hard part is holding index funds steadily, rather than trying to beat the market.
You may never have Buffett's stock-picking acumen, but it is easy to learn his buy-and-hold attitude.
