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Why Aren't There More Warren Buffetts in the World?

GuruFocus.com

- By Rupert Hargreaves

Why aren't there more Warren Buffett (Trades, Portfolio)s in the world? This might seem like a silly question, but it is worth considering because, as with so many questions in investing, there's no simple answer.


No simple answer

Many people might answer the above question by saying, "Buffett is the greatest stock picker of all time."

That is true to a certain extent. His track record of picking stocks and managing businesses is exemplary.

However, a few years ago, a study (Buffett's Alpha) noted that the Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B) CEO's returns were not particularly impressive compared to a basket of stocks with similar qualities.

The authors of this study reported that while Buffett's stock-picking returns were not that impressive, his ability to leverage returns (through the insurance business) and long holding periods were his standout qualities.

These findings went some way to answering the question posed at the beginning of this discussion. Buffett has been able to leverage his return by using the float from his insurance companies.

The cost of this leverage has been below zero in most cases. To put it another way, Buffett was effectively borrowing money at a negative rate of interest long before it was cool.

Even with interest rates today, this is a luxury available to only a handful of borrowers.

Buffett's ultra-long-term investment mentality has also helped the billionaire.

Charlie Munger (Trades, Portfolio) once remarked, "I find that's all you have to do to get ahead in life is to be non-idiotic and live a long time."

Buffett has ticked both of these boxes. He has been investing professionally since the mid-1950s.

On top of that, he has been leveraging his returns since the 1970s. That's five decades of leveraged returns.

The average annualized total return for the S&P 500 Index over the past 90 years is 9.8%.

Levered up 1.5 times, that could be as much as 14.7% per annum. An investment of just $1,000 invested at this rate for five decades would grow to be worth $1.5 million. An investment of $100,000 would grow into $150 million. These figures clearly illustrate how Buffett has been able to use time and leverage to his advantage.

The factor of luck

Another factor to consider is luck. Buffett has been fortunate during his career. From finding backers who were willing to support him in the early days to being born at a time when U.S. stock markets were highly inefficient, Buffett has been able to make the most of these trends.

He's also been lucky enough to meet some great managers who he has appointed to run his businesses and who've been willing to sell to him.

These observations can help us improve our investment process. Buffett has had a successful career, but there's no guarantee it can be replicated. If we acknowledge this fact, we can focus on building a strategy that works for us, not Buffett.

Indeed, there are some strategies Buffett uses that may be down-right dangerous for the average investor. These include using a highly concentrated portfolio, using leverage or buying a handful of stocks forever. Just because this strategy has worked in the past does not mean that it will work in the future.

Conclusion

So to answer the question as to why there aren't more Buffetts in the world, survivorship bias seems to be a good answer.

Buffett has been successful as an investor, but millions of other investors have failed or struggled. We need to keep this in mind and avoid focusing on the Oracle of Omaha entirely.

While he has been successful, he has also been lucky. Few other investors have been dealt the same hand. It's worth keeping that in mind when considering Buffett's career and investments.

Disclosure: The author owns shares of Berkshire Hathaway.

Read more here:

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  • Michael Burry Doubles Money in 3 Months on Crisis Bets



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This article first appeared on GuruFocus.