Warren Buffett is a legend.


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With a net worth of over $75 billion, the second-richest man in the world has cemented his place in the pantheon of investing greats. Investing with Buffett and his investment company Berkshire Hathaway would have been incredibly profitable for you. $1000 invested in 1964 with Berkshire, when Buffett became the majority shareholder, would be worth more than $10.5 million today.

Suffice it to say, Buffett is sought after for his insight into investments. He’s held up as the ideal investor for ordinary savers everywhere to model. Google the phrase “Invest like Warren Buffett” and you’ll be reading all about the merits of value investing and how his favorite holding period for stocks is “forever”.

Except it’s not completely true. There’s a disconnect between what Buffett does and what he preaches:

“Our favorite holding period is forever”

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This is a neat idea and makes sense in theory. If you own the right shares in the right companies, then the right holding period is forever. Why would you ever want to give up stock in a company that is continually doing well? In reality, we have to understand that Buffett isn’t being completely literal here.

Like many super-successful investors Buffett has been extensively studied. A study by Hughes, Liu and Zhang titled “Overconfidence, Under-Reaction, and Warren Buffett’s Investments” looked into whether or not Buffett follows his own advice.

Sort of…..

berikshaire1

The authors of the paper scoured through all the public filings provided by Berkshire Hathaway between 1980 and 2006. In those 36 years of data, they found that 60% of the positions held by the investment company were for a duration of less than 4 quarters. In other words, most of Buffett’s positions are held for less than a year. Nearly 30% of stocks were sold within just six months.

Basically Buffett applies common sense. He ditches his losers, and holds on to his winners for a long time – at least until the reasons he invested in the first place change.

“It’s Far Better To Buy A Wonderful Company At A Fair Price Than A Fair Company At A Wonderful Price.”

There’s this idea that Warren Buffett is a value investor, and he is to a certain degree, but it’s a misconception that he’s sitting in his office trying to find companies that are undervalued, companies that he then invests in and holds onto forever.

Two of his most famous purchases, Geico and American Express, were actually distressed stock plays rather than traditional value plays. Both stock buys happened at a time when the companies were on the edge of insolvency.

Then there are the deals he made with GE and Goldman Sachs. It was 2008, the country was in the middle of an economic crisis and General Electric were sinking fast. They needed money – the kind of money that only someone like Warren Buffet and small petro-states have access to.

They were desperate and Buffett used that to his advantage to pin them to the floor. He took a $6 billion dollar position and extracted maximum value, in the form of a delicious 10% dividend. GE typically offers a 3.25% dividend to regular shareholders. He also received an option to buy shares at a special price regardless of what the shares were trading at.

Warren Buffett is seen as this kindly old man and his folksy wisdom has made him endearing to the public but in this case, Buffett acted like a typical hedge fund profiteer.  There’s nothing wrong with taking advantage of companies who need money, especially when you have the funds but Buffett went on to describe his actions as a long-term value play.

berikshaire2

Not so much. The modern Buffett got where he is by wielding huge amounts of cash and taking advantage when opportunities presented themselves, essentially playing banker to the largest corporations in America.

That’s the person you’ll need to model if you want to invest like Warren Buffett.

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1 COMMENT

  1. It seems to be hard to take what you’ve said as fact when you back down and I’m left still without any solid info to invest the little money I have! Is Mr. Buffet available?

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