One comment stands out for me among a sea of excellent ones made by Morgan Housel in his book, The Psychology of Money. It concerns arguably the greatest investor around — Warren Buffett.
The luckiest man alive?
The US writer doesn’t pull any punches: “Trying to emulate Warren Buffett’s investment success is hard, because his results are so extreme that the role of luck in his lifetime performance is very likely high, and luck isn’t something you can reliably emulate.”
To some readers, this may sound almost blasphemous. Buffett is hailed as a living embodiment of the American Dream: a self-made billionaire, a market genius, an inspiration for us humble Fools.
But Housel has a point. On reflection, Buffett’s incredible returns are the combination of three things: a winning stock-picking strategy, time and, yes, seriously good fortune.
Buy right
Buffett likes buying great companies at a discount. For example, he bought shedloads of Coca-Cola in the 1980s when no one really wanted to. More recently he invested in tech titan Apple when the iPhone maker reported a slump in sales.
I’ve tried to apply a similar strategy by constantly looking for ‘economic moats’ — things that should protect a business (and its profits) from rivals. This could take the form of a strong brand or global reach or the hassle involved in switching to a competitor.
This is why I’m invested in stocks such as Games Workshop and Somero Enterprises. Both are leaders in their (very) niche markets.
Hold on
Once he’s found a good thing, Buffet does the thing most of us struggle to do: he holds on. So long as he’s bought well, this should allow him to take advantage of compound interest. It’s this that allowed him to become one of the richest people on Earth.
But the key thing to grasp is that he has no control over if/when opportunities appear in his chosen market. If they hadn’t in the past, Buffett’s returns may have been (significantly) different. And the fact that they did still didn’t guarantee that the outcome would be positive. In other words, Buffett could never be completely sure that Apple and Coca Cola would bounce back to form.
Should I ignore Buffett?
If luck played such a vital role in Buffett’s success, should I stop listening to him? I don’t think so. In fact, I believe adopting his approach helps to shift the odds of success in my favour.
It’s because even Buffett doesn’t have a crystal ball which makes having a long-term focus as an investor all the more important for me. He’s been willing to make big but calculated bets when most people aren’t. And that’s what can separate good returns from incredible ones.
He’s also taught me not to sell when Mr Market has a wobble for whatever reason. And I’ve had quite a lot of practice at this over the last couple of years!
Time to buy
The market doesn’t owe me riches, as much as it didn’t owe Buffett anything. All I can do is take advantage of opportunities to load up on high-quality stocks that other (less patient) investors no longer want to own. And then cross my fingers.
To me, one of those opportunities is playing out now.