Why don’t we make money like Warren Buffett?

Last week, I wrote about Warren Buffett’s annual letter to Berkshire shareholders. In it, he gave advice on investing. It all sounded so simple. So why do so many of us fail all the time? Surely it is easy to listen to what the world’s most successful investor advises us to do and just follow what he says?

We believe that know more than we do
How many people read a company’s financial accounts, forecasts, get transcripts of shareholders meetings, study the trends of the industry a company is operating in? In 15 years of advising people on their money, I have met 2 people who thoroughly research a company before they invest in them. Everyone else reads about the company in the paper and goes off the back of that. And guess what? The market has already priced that news you have read about into the share price, so you have missed the boat. So, if you do not think you know it all, buy an index and stick with it or find a fund manager who will research the market and will try to beat a benchmark higher than the industry average.

Time to the market
I’ve lost count of the amount of times that clients have told me they’ll get out when they see a value fall. But stocks go up and down every day. Who’s to say if it’s a blip or a crash? Can you time the market consistently? Buffett says he can’t. What make you think you can do better and on a consistent basis?

Short termism
What is the longest you’ve ever held a stock or fund for? In 1960, the average length of time was 8 years, today it’s 4 months (some other reports say it’s just a matter of seconds). Not even long enough to receive a dividend. Buffett says “Lethargy bordering on sloth remains the cornerstone of our investment style”. Buy and stay with it.

Base our decisions on things that don’t make sense
2007/08 – Irish bank share prices plummet amid rumours that they have run out of cash and can’t borrow. What do people do? Plough money into these banks based on nothing more that Irish banks have always been strong performers. No research, nothing. Why would you do this? Do you know better than everyone else? Unlikely.

There is no such thing as a quick profit. Or at least, you can’t do it consistently. I wrote a blog on this before but you get significantly better returns if the fund grows steadily over time instead of drastic ups and downs. If you get a good return, don’t be greedy. Rebalance your portfolio once a year, selling a portion that has done well.

The stock market crash in 2008 was solely based on sub prime mortgages being repackaged into bonds and sold on. Then why did people sell stock in other unrelated industries? Were people going to stop drinking Coca-Cola, using computers or stop buying washing powder? No? Then why sell stocks in the companies that sell this stuff? If you invest in the stock market, you have to expect ups and downs. Investing is a long term activity (despite the short termism already mentioned), so as long as the company is still fundamentally sound, keep the stock. There’s no point in selling in a panic when the stock value has plummeted, it will only compound your panic.

Investing money can be very emotional. Afterall, you worked hard to earn the initial sum and you feel elation when it goes up in value and despair when it goes back down. That is why we try to take the emotion out of investing for our investors. We let them know the term of their investment, we will not change the funds for 5 years minimum and we will rebalance every year. Having someone who is not emotional attached to the value of the portfolio can help clients from making bad decisions with their money.