Extra Investing returns by Investing Like Warren Buffett
Posted on | July 27, 2010 | No Comments
Overconfidence, Underreaction to Warren Buffett’s Investments is an interesting paper I saw at Simoleon Sense. To understand the all the details I suggest you read it yourself. You may derive different conclusions than I did. I had a few take aways.
First, that despite all logic to the contrary, if you had followed Warren Buffett’s investments in public companies from 1980 to 2006, once the trades were announced you still would have had real, significant returns. Approximately 6% returns (pg.13) The authors postulate that there was overconfidence by other traders as the root cause.
Second, more interesting to me is that Mr. Buy and Hold forever’s average holding time of an investment during this time was only one year (pg.10) with only 20% of the stocks being held more than two years. While nearly a third (30%) were sold in less than six months. This seems a case of do as I say and not as I do. I have often said that if you want to make money like Buffet you need to invest like Buffett did in the days of his investment partnerships. These funds were more like hedge funds and were more Graham oriented in style than Buffett has become. They also involved more buying and selling. I know this is not fashionable for value investors, but it worked for Buffett when his returns were often 50% a year. A small investor’s competitive advantage over large investors is that he or she can put money in less liquid investments without moving the needle very much.
Third, Buffett does run a relatively concentrated or focused portfolio. His average holdings in the 1980′s was 22, 12 in the 1990′s and 33 beyo0nd 2000 (pg.11)
Fourth, the study says that, “it appears that Buffett avoids firms with high asset growth that under-perform the market and invests in large firms with low book-to-market ratios and large accounting accruals, characteristics generally associated with low returns.”
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Tags: Beginning Investor > Small TIme Investor
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