Invest Like Warren Buffett? Be Boring.

Warren Buffett is the most famous investor of the past 50 years and, undoubtedly, one of the most successful.  Throughout his career at Berkshire Hathaway, Buffett’s holding company out of Omaha, NE, he’s produced an annualized rate of return of 19.1%.  The annualized rate of return of the S&P 500 over that same time is just over 10%.  So how does Buffett, the “Oracle of Omaha,” do it?  And how can you replicate this type of investment performance? 

To be certain, Buffett, through Berkshire, employs several strategies that should not (and cannot) be attempted by most types of investors – and that includes both amateurs and professionals.  For example, Berkshire has the financial capital to acquire large ownership interests in individual businesses, help make key management decisions and exercise a certain amount of control over the direction of those businesses.  Most individuals simply lack the resources to make these types of investment plays.  But Buffett’s fundamental approach to investing is applicable to all investors, and simply requires patience, discipline and commitment to a long-term process.     

Warren Buffett’s investment success over the past half-century isn’t the result of precision market-timing, early entrance into successful IPOs or a decades-long streak of only picking winning stocks.  Rather, Buffett relies on timeless principles such as low costs, diversified exposure to equity and the awesome power of time and compounding interest.

Last weekend, Buffett released his annual shareholder letter that outlined Berkshire’s performance in 2017 and touched on a few other subjects, notably the conclusion of his famous (and successful) bet that hedge fund managers couldn’t beat the S&P 500 benchmark over a 10-year period from 2007 through 2017.  The annual release of Buffett’s Berkshire letter, along with the annual shareholder meeting held each May in Omaha, have become Super Bowl-like events in their popularity and excitement among the investment community.  A few notes from this year’s letter:

  • Buffett’s Bet:  December 19, 2017 was the end of Buffett’s 10-year bet with Protégé Partners that a low-cost investment in an S&P 500 index fund would, over time, deliver better investment results than hundreds of investment professionals managing hedge funds.  The bet wasn’t even close.  Since 2008, the S&P 500 has delivered an annualized rate of return of 8.5%.  The 5 competing funds selected by Protege delivered annualized returns of 2.0%, 3.6%, 6.5%, 0.3% and 2.4%.  In Buffett’s words:

The bet illuminated another important investment lesson: Though markets are generally rational, they occasionally do crazy things. Seizing the opportunities then offered does not require great intelligence, a degree in economics or a familiarity with Wall Street jargon such as alpha and beta. What investors then need instead is an ability to both disregard mob fears or enthusiasms and to focus on a few simple fundamentals. A willingness to look unimaginative for a sustained period – or even to look foolish – is also essential.”

On the high costs of working with hedge funds compared to the low-cost options of indexing:

Performance comes, performance goes.  Fees never falter.”

There’s a broad misconception that high fees allow access to smart investment pros who, in turn, deliver superior investment results.  This fallacy has been empirically documented over the years and Buffett’s bet is a simple reminder that low-cost market returns are generally superior to high-cost active management. 

  • The Simplicity of Smart Investing:  In the letter, Buffett describes investing as simply “an activity in which consumption today is forgone in an attempt to allow greater consumption at a later date.”  Forget ticker symbols, trade journals, chart analysis and 10-K reports.  Successful investing is the product of 1) setting aside money, 2) giving it broad equity exposure, and 3) letting time and the growth of American (and international) businesses increase the value of your holdings.  Buffett notes that “in America, equity investors have the wind at their backs.”  Not all years are good years but, over time, patient investors will be rewarded.


  • Even Warren Buffett Often Underperforms in Any Given Year:  Consider this: over the past 20 years, Berkshire Hathaway stock has underperformed the S&P 500 nine times!  That includes one year – 1999 – in which the S&P 500 went up 21% while Berkshire stock fell 20%!  Barron’s ran an article at the end of the year titled What’s Wrong, Warren?”.  In fact, each year of underperformance has led to some discussion wondering whether Warren Buffett has “lost his touch.”  It’s important to remember that a single year is such a tiny window of a long-term investment time horizon.  Even a 10-year period is relatively short-term performance.  The whole obsession with calendar year investment performance is rather absurd.  It’s not as if the stock market resets every year on January 1st.  Returns should be evaluated in the aggregate, over long periods of time.  Again, this requires patience and commitment to a process.  It takes incredible discipline to stick to a strategy that at times loses money or underperforms in short periods of time. 

Warren Buffett’s strategy hasn’t changed over the past 50 years and, other than each year’s business update, Berkshire’s annual letter makes the same mention each of year of patience, value investing and focus on the long-term.  There’s no magic bullet that one needs to find each year to be a successful investor.  Decades of historical data and evidence all validate the approach to investing that is executed by Buffett.  You, too, can be a successful investor just like him.  But it’s a lot more boring of an exercise than you might expect.