You don’t need to be told that Warren Buffett is one of the most amazingly successful investors in history. He’s developed a phenomenal system that’s resulted in making billions of dollars in the stock market. But unfortunately, small investors have tried to emulate the methodologies Buffet used at Berkshire Hathaway. It sounds easy enough: You learn about a company, spot so-called “undervalued” stocks, buy them, and hold on!!
We said “unfortunately” above, because too often, that method just doesn’t work out. And it fails for the same reasons that growth systems don’t work for most people: It’s too complicated and time-consuming. That’s obvious.
It also requires some guesswork on the part of individuals. How can you be certain that a company is currently undervalued, and it will eventually begin to rise higher again? Do you have the time, resources and know-how to do all the research and analysis that Warren Buffett and Charlie Munger do at Berkshire Hathaway? I’m gonna say that’s a no. And that’s just on the buy side. How about on the sell side? This is where the Buffett emulation has hurt a lot of people. Don’t get me wrong – I’m not disrespecting or doubting Mr. Buffett! He’s got a great system that works well in his situation. I’m just saying it’s not so easy to re-create at home.
For most at-home investors, it’s not the waiting that’s the hardest part – it’s the selling (sorry, Tom Petty). The old adage about “buy and hold” morphs into “buy and forget about.” So investors often sit with big losses, continuing to believe that the stock is bound to go up…someday.
And by the way – Buffett does sell shares. He’s not obligated to tell you about it on the day he sells, but the news media often learns about it after the fact, as Berkshire Hathaway discloses its trades. So even buy-and-hold investors understand that selling is often the right move. And to be fair – the retail investor and the news media have seriously misinterpreted Mr. Buffett’s strategy over the years. Of course, they’ve oversimplified it to the point where it’s useless to individuals in many cases, and even harmful in some. You can bet that’s not something that Warren Buffett intends.
If you need any proof that buy and hold isn’t necessarily the best strategy, think about what happened to investors in the 2008 and 2009 bear market. The general market had begun to show weakness in the autumn of 2007. But as selling intensified in the autumn of 2008, many investors didn’t know what to do. Because there’s a bias among investors against selling, individuals waited for things to get better. But it took until March of 2009 for a new uptrend to begin – and as of November, 2009, most investors still aren’t back to where they started! Remember – that bias against selling comes from those professional investors who appear on TV and write columns for magazines. They can’t just start unloading all their holdings, because they need to keep a certain amount of money invested at all times (essentially, most of them are fully invested 100% of the time). So they advise you to act the same way. That’s pretty silly, and it results in you getting hurt.
Think of it this way: What if a professional athlete advised you to train exactly the same way he does, year-round? Sounds good, right? Here’s the training plan of a winning athlete! Just follow this, and you’ll be a winner, too! Not so fast. That pro athlete has a staff. He’s got a sports-medicine doctor. A physical therapist. A nutritionist. Maybe a massage therapist, yoga or stretching instructor, weight trainer, and undoubtedly some coaches for sport-specific instruction and motivation. You. Don’t. Have. That.
So when he tells you to eat spinach every day and run wind sprints, he’s not lying, but there’s a lot he’s omitting. And by omitting what really goes into his program, day in and day out, he’s leaving out the very information that you need, if you don’t want to get hurt.