You Are Not Warren Buffett

Newsflash: You are not Warren Buffett.

Newsflash #2: Neither am I.

The big difference between us?  I have no desire to be or even emulate Mr. Buffett.  Oh sure, his performance is outstanding.  But I’m not really interested in waiting 40 or 50 years for the results.  To say nothing of being fairly certain I don’t have that much time left to wait (although he did accumulate the lion’s share of his wealth after 50).  I’d much rather use compounding to take a short cut to the powerful returns he has generated over a long (long) period of time.  I’m guessing you find yourself in similar circumstances.

It’s always interesting to me when I read/hear about folks looking to copy the “Sage of Omaha.”  When friends mention that to me, I kindly remind them of one very important (but often forgotten/ignored) fact.

They don’t have his cash-flow.  

And I bet most of my net worth that you don’t either.

There is little argument that Mr. Buffett has  demonstrated remarkable investing prowess for many years.  But I would argue that a significant portion (if not all) of that ability is a direct result of his investment time horizon.  To wit, he generally holds investments until Juvember 32nd, 2nevernever.

Berkshire Hathaway (the Warren Buffet investment vehicle) likes to buy whole companies with strong growth prospects at “good” prices and hold them into perpetuity.  A “good” price is when an asset is trading at or, more often, well below its so-called intrinsic value.  Intrinsic Value is the value of a security which is intrinsic to or contained in the security itself. It is also frequently called fundamental value. It is ordinarily calculated by summing the future income to be generated by the asset, and discounting it to the present value. Simply put, it is the supposed “actual value” of a company as opposed to the market value.

After purchasing these type assets, Warren Buffett does a “crazy” thing.  He does nothing.  He allows the company management to continue growing the company with little to no input or influence from him (usually anyway).  In so doing, he provides a strong, stable platform for the businesses he owns to grow.  Each company’s management team can make long-term, strategic business decisions without fear of the quarterly grade delivered to public companies held hostage to the quarterly earnings report.

The way Buffett is able to do this is because he doesn’t have a need to extract the capital tied up in owning any particular company in order to better deploy that capital.  Nor does he need the returns to fund his frequent trips to the neighborhood Dairy Queen.  If anything, he has long had a need to NOT get his capital back from investments.  How is that you ask?  Simple… he owns an insurance company which throws off mountains of yield hungry cash (also known as premiums).  If he traded companies (as opposed to investing) he would likely be constantly sitting on a pile of low return cash.  Not good as insurance companies go.

So… unless you have insurance company premium type cash flows sitting around/coming in, the chances of you employing the Warren Buffett strategy effectively are slim to none…

So maybe you should try a different way.