Can Small Investors Follow along with Warren Buffett
Warren Buffett is the world's most successful investor. His investment strategy works marvelously well - for Warren Buffett. In our experience, many small investors lose money trying to follow in Buffett's footsteps.
Buffett works with a list of companies whose stock he would like to own. He monitors these companies and their management teams. He is prepared to wait years for an opportunity to buy these stocks at the right price. If a stock never reaches his target price, Warren does not buy it - no matter how much he likes the look of it. If a stock reaches his target price, he buys big. Then he waits. This is the "classic" and best-known Buffett investment method. (He has several.)
Over time, his stock buying decisions have been amply rewarded.
So how does Warren Buffett identify the stocks he would like to own? Firstly he selects the stocks of companies with a uniquely competitive market position. Often the competitiveness arises through the strength of a brand name such as Coca-Cola or Gillette. He buys a stock if and only if its share price drops below its long-term true value (intrinsic value).
Having bought, Buffett typically holds for a long time - provided the companies perform to his expectations. The companies grow strongly, the share price grows strongly, and the value of Warren Buffett's stock portfolio grows strongly.
Buffett advocates that investors hold a "concentrated stock portfolio". In other words, you should own a very small number of stocks, say six at most, and you should know everything there is to know about these stocks.
Unfortunately, small investors often fail to implement Buffett's strategy successfully. For one thing, many of us - Buffett included, learn investing through trial and error. Sure, we read as much as we can before we begin, but reading isn't enough. It's only when you've put your own savings on the line and lost money that you really learn. Making mistakes is the way most of us learn the most important lessons.
But if you've got to wait 5 years before a stock you'd like to own sells at the right price, then you're going to miss out on a lot of market experience. And then it turns out you waited five years to make your first mistake. The next five years will give you a lot of time to reflect on that. You just have to hope that you learn enough from your first mistake not to make a second.
Small investors who want to invest like Warren Buffet fail firstly because they do not have access to the quality of information Buffett has. Compared with most of us, Warren Buffett has enjoyed a privileged position from the very beginnings of his career. He is the son of a United States Congressman - a Congressman who also just happened to be a stockbroker. The Buffett family has been described as "pillars" of their home state of Omaha.
From the start, Warren Buffett has been able to chat with and gather information and advice from CEO's and other big movers that small investors have no access to. Warren began trading in stocks at the tender age of 11 years.
Beginning investors fail because they learn in "How to be a New Warren Buffett" books that they must invest with a ten-year perspective or longer. When their stocks go up, they're happy. When their stocks do down, they're less happy but they tell themselves "I'm a long term investor". When their stocks continue to go down, they get worried. When their stocks go down even further, they eventually give in and sell - at a big loss. They do not have the long-term confidence in their stocks that Buffett - through superior information sources and superior market experience - has in his.
Buffett buys his stocks with a skill few of us can match. Most small investors, filled with enthusiasm from reading "How to be a New Warren Buffett " rush out and buy stocks. Unfortunately, most of them pay too much for their stocks or the stocks don't have as good long-term prospects of Buffett's own picks.
They fail because, in addition to lacking Buffett's superior access to information, they lack his temperament. Buffett says if you cannot watch your portfolio lose 50 percent of its value without becoming panic-stricken, you shouldn't be in the market. Well, according to that criterion, most of us should think very hard before investing in stocks. Although perhaps not panic stricken, most of us would be deeply perturbed if our portfolio lost half its value. For most of us, the money we're putting into stocks is hard earned. To watch it disappear is distressing. Many investors doggedly hold on to their inferior stocks, believing they are following the Buffett way. In reality they aren't and they will not be rewarded because they paid too much in the first place for inferior stocks.
Small investors fail because they do not have Warren Buffett's genes. Buffett is an unparalleled genius who has thought deeply about investment for decades. He has developed an immense array of strategies and tactics to keep his wealth increasing, irrespective of market conditions. You should no more think you might emulate Warren Buffett in the space of a few years than believe that by studying physics in your spare time for month or two, you might emulate Albert Einstein or Isaac Newton.
Our opinion is that SEND and TREND are more useful tools for most small investors than Warren Buffett's methods. SEND identifies stocks that should do well. TREND keeps you in them while they do well and gets you out when the market begins to grow wary of them.
In our opinion, Warren Buffett's methods are appropriate for highly experienced investors who share Buffett's temperament. New investors may be happier beginning their investing careers with other investment methods.
By investingator.com
http://www.investingator.com/warren-buffett-investment-strategy.html
