If Warren Buffett’s Strategy Works, Why Doesn’t Everyone Use It?
Warren Buffett and Value Investing - Not as easy as it sounds!
Warren Buffett is a God among value investors, and for good reason. Warren Buffett champions the value investment strategy, and puts no credence in day to day movements in share prices, the impact of the economic mood overall or any other external factors. Buffett maintains a long-term perspective at all times, and never loses sight of the underlying value of a business.
Thousands of articles and dozens of books have been written on Warren Buffett and his way of investing. Warren Buffett has shared his strategy of finding value stocks, of thinking of stocks as a business, of increasing the investment size, of reducing the portfolio churn, of learning in probabilities, and of ignoring the market forecasts among others.
Yet, after all these articles and all this information, we have not heard of a single investor in the world who has been able to put it to use, and become half as famous (and rich) as Warren Buffett!
Is Warren Buffett a bad teacher? Not at all.
It just proves that the stock market is far too complex. It also proves that there is a lot more to the market than just one strategy. If one strategy starts working for everyone, the market will cease to exist!
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So why doesn’t Warren Buffett investment style work for most people? Here are a few reasons –
- It is not easy to identify real value stocks. After all, there are thousands of people analyzing each company listed on NSE and BSE. In most cases, if a company is cheap, it is for a reason.
- Contrarian approach. Warren Buffett buys when others are selling, and sells when others are buying. This means investors should have the conviction in the companies they pick. However, retail investors are not experienced enough to follow this approach systematically.
- Patience. Value investing requires a lot of patience. The value of the stock goes up when other investors realize the intrinsic value of the stocks, or the market conditions in general turn favorable. This can take several years. When retail investors see others making money from high flying stocks, it is easy to lose confidence in their value picks.
- Access to Research. Warren Buffett has access to almost all qualitative and quantitative data of the companies chooses to research. This includes access to their customers and suppliers. It also includes access to the management team. This is a huge piece of the puzzle. Most retail investors have access to quantitative data, but no access to everything going on in a particular company or an industry.
- Partial understanding Warren Buffett’s strategy. Another important reason why we don’t have even a single investor like Warren Buffett is, most people have a partial understanding of Buffett’s strategy. For example, one of the key rules of the strategy is “invest only in companies that you understand”. How many investors really understand the companies they invest in? Most people pick and choose from Buffett’s complex stock picking process.
- Not able to identify value trap. When value stocks do not return high returns, they are known as value traps. In other words, the stock looks like a value stock, but they are priced just right. Not knowing how long to wait for value stock is another reason why most people fail to make money from value stocks. Graham (Warren Buffett’s Guru) says if a company doesn’t return 100% in 5 years, sell and move on.
Did you know Warren Buffett also said the following? But you never hear about it because it seems to go against conventional wisdom.
“Diversification is a protection against ignorance. It makes very little sense for those who know what they’re doing”
“Wide diversification is only required when investors do not understand what they are doing”
These Wall Street Journal, Value Stock Guide, and BusinessInsider articles talk about the pitfalls of value investing.
Lastly, value investing is not for everyone. It is intended for investors who are patient, and have a long investment horizon.