Warren Buffett is considered one of the greatest investors of all time. And rightly so. His track record is nothing short of remarkable, nearly doubling the compounded annual return of the S&P 500 since 1965. While few will ever be able to match his success, there are valuable lessons to be learned from his investment approach that can make us all better investors.
Buffet employs an ownership mindset when investing. As mentioned in his 1996 annual letter, “If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes.” An ownership mindset instills discipline in the investing process. If you were contemplating purchasing a private business, you would naturally conduct an exhaustive due diligence review to gain a thorough understanding of the business fundamentals and financial strength of the company. Talking to friends and reading a few news articles about the business would not suffice. One should have the same mindset before investing a dollar into a publicly traded company. The advantage of this owner-oriented mindset is that it allows you to focus on the long-term cash generation potential of the business and not the day-to-day swings of the stock price.
Albert Einstein once said compound interest is the 8th wonder of the world. Yet the power of compounding continues to elude many. Why? Because it requires extreme patience and the ability to do nothing. As Brian Feroldi recently wrote, the only way to own a 10-bagger (make 10 times your money) is to not sell an investment that has already risen 100%, 200%, 300%, 400%, 500%, 600%, 700%, and 800%. The holding period returns for some long-term investors is quite impressive, BUT they had to endure significant drawdowns along the way while avoiding the temptation to sell. The following factoid from the book The Psychology of Money demonstrates well the immense power of compounding. $81.5 billion of Warren Buffett’s $84.5 billion net worth came after his 65th birthday.
Mistake avoidance is crucial to investment success. While all investors will make mistakes, it is important to minimize the self-inflicted wounds that work against compounding. One of the biggest pitfalls is attempting to time the markets based upon forecasts or economic events. The global pandemic is an excellent example. Who would have thought after falling 35% in the first few weeks of the pandemic, that stock prices would soar (recording their best gain in years) even in the midst of a voluntary shutdown of the global economy? Additionally, the price of missing out on just a few good days can be quite costly. If you missed the 20 best days in the market over the last 15 years, your average annual return would have been less than 2%! Even if one were able to forecast future events (highly unlikely), determining how the market will react to those events is quite another thing altogether.
We would all do well to take the above advice from Mr. Buffet to heart. I highly recommend reading his annual letters. They are full of timeless insights that can help us all on our journey to becoming better investors.
The opinions expressed are those of PYAW’s Investment Team. The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Forward looking statements cannot be guaranteed.
PYA Waltman Capital, LLC (“PYAW”) is an investment adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. More information about PYAW’s investment advisory services can be found in its Form ADV Part 2, which is available upon request. PYA-22-11