Warren Buffett is arguably the most famous investor in the world, maybe even the most famous ever. He is often referred to as the “Oracle of Omaha,” a nickname that certifies his legendary status as an investment pro, salted with a bit of mysticism. His opinions are eagerly sought by the financial media (and even the non-financial media), he’s quoted often, and articles and books are written telling us to “invest like Buffet!”
But can we invest like Buffet? Probably not, and here’s why.
Buffett Is an Exceptional Talent
For one thing, Warren Buffett worked as a stockbroker early in his career. This gave him a level of market experience that the vast majority of investors never have. How he made his fortune, however, is even more exceptional.
Buffett displayed an uncanny investment sense early on as an investor in small businesses and partnerships. As these grew, so did his wealth. He made his first million by the time he was 32. That may not sound so spectacular by today’s standards, but he did it in 1962, when a million dollars was a million dollars, and far fewer people than today had that kind of money. He did all of this while he and his wife were raising three young children.
You Probably Have a Day Job
If you’re like the average investor, you probably aren’t a stockbroker, and you probably don’t even work in a job that’s remotely connected to Wall Street. What that means is that investing will be no more than a side venture for you. You won’t have time to track companies, sift through reams of financial reports, and assess competition and markets.
Translation: you’ll have to rely on third-party information that’s available to nearly every other investor. That information will be generic in nature and unlikely to reveal any hidden opportunities to exploit—or landmines to avoid.
Buffett Has First-Hand Information
As a multi-billionaire running a multi-billion dollar company, Warren Buffett has access to information few will ever have. The size of his bankroll and that of his company enable him to pay for information at prices ordinary investors can never afford.
Buffett and his company can pay to maintain a staff of in-house analysts who can research and analyze deep-level information on any company he might consider buying. In addition, when you’re that big, information has a way of finding its way to your office via the businesses who might be interested in your taking an investment position in them.
You Don’t Have His Billions
According to Forbes, Warren Buffett is the second-richest person in the world, with a reported net worth of $77.2 billion in 2017. Berkshire Hathaway, the investment company Buffett runs as chief operating officer, has total assets in excess of $620 billion—higher than the gross domestic product (GDP) of most of the countries in the world. That level of wealth can provide two very critical advantages that are not available to the average investor:
- It can enable you to buy positions in companies at advantageous prices, knowing you have the capital (and the control it brings) to improve the business, and
- It can enable you to diversify your investments and ride out any market storms for a very long time.
Simply put, Buffett has both bargaining power and staying power at levels available to only a few hundred people on the planet.
Buffett Can Influence the Firms He Invests In
When you have the financial resources of a Warren Buffett or of his company, you can take substantial investment positions in companies. That translates to at least some measure of control over the company’s operations.
In many businesses, Berkshire Hathaway has 100% ownership. In others, where the company takes a minority position, that stake is usually greater than 10% of a company’s stock—with the promise of additional investment in the future. With most of its investments, Berkshire Hathaway isn’t buying and selling stocks, it’s buying entire companies.
Compare that with the 100- or even 1,000-share positions that average investors take in companies with millions of outstanding shares—we get a prospectus telling us what the company is doing and an opportunity to vote for the officers once a year. Our positions are a fraction of a percentage point of the total outstanding shares.
What We CAN Learn from Warren Buffett…
OK, so we can’t invest like Warren Buffett, but there are a few things he does that we can and should try to follow.
Buffett is a “value investor.” This means he invests in companies whose stock is considered undervalued based on the firm’s book value or price/earnings ratio, or is paying high dividend yields, among other factors.
Buffett is not an off-the-shelf investor. Either a company represents a value (or discount to the market) of some sort or he’s not interested. Long-term, this stacks the investment deck in his favor.
Buffet knows how to move strategically—both when and how. Since he’s effectively buying below market, he can wait out down markets and ride rising markets as long as he likes. Many investors do the exact opposite. They follow the herd by buying the trends—buying what’s “hot” and, worse, buying when everyone else is buying (under the assumption of safety in numbers), then selling when everyone else is selling. That’s a recipe for entering heavily at or near market tops and exiting during market slides and sometimes even crashes.
Buffett isn’t buying stocks, and he’s certainly not buying markets. What he is buying are solid companies, whose stock is selling at a discount. That’s something we can all do, even if we don’t have billions to buy entire companies. The long-term nature of retirement investing should make that strategy even easier to follow.
…and from Buffett’s Business Partner
We can also follow the Berkshire Hathaway way by heeding some advice from Charlie Munger, Warren Buffet’s business partner (his official title: vice chairman of Berkshire Hathaway). Like Buffet, Charlie Munger is well known for his ability to make savvy investments.
His philosophy to wealth is to spend less than you make and to invest the difference in the best tax-advantaged account available. Apparently he believes that’s the Roth IRA, because back in 2010, when the IRS lifted the income cap on converting a traditional IRA into a Roth, he announced he was going to do a conversion.
Why Munger Likes Roth IRAs
Roth IRAs give you the advantage of not paying taxes on your assets’ growth. For obvious reasons, the younger you are, the more beneficial this tax advantage will be. Not only will you have more time to recover the taxes on the money that you put in, but your nest egg will have plenty of time to build and grow tax-free.
Of course, that’s true of Traditional IRAs, too. But in terms of estate planning, Roth IRAs have a benefit over other retirement accounts. In traditional retirement accounts, the beneficiary (other than a spouse) must pay taxes on required distributions they take from the account. In a Roth IRA, the savings benefit to the beneficiary can be substantial. They will be able to inherit the money free and clear of any tax liability, as the original account holder has already paid taxes on the investment.
Another benefit of a Roth IRA is that there is no requirement to take minimum distributions once you reach a certain age. Other traditional retirement funds require you to start withdrawing funds, usually at the age of 70½ .
Some Caveats to Converting to a Roth
If you are ready to convert your account from a Traditional IRA to a Roth, there are some details you should be aware of. You will have to pay taxes upfront on the converted funds (because they got taken off your taxes when you contributed them to the IRA originally), and the amount you convert will be added to your income for the year.
Depending on how much you have, you can end up paying the tax man a good chunk of money. Remember, though, that once you pay the tax you can grow your account and eventually withdraw from it tax-free forever more.