For many analysts, earning an 8% annual return is already a feat for an individual investor. For others, the feat is beating the index. Warren Buffett says you shouldn’t settle for these mediocre returns and insists that anyone can beat the market. Skeptics, of course, argue that unless you have Warren Buffett’s qualities and skills, it is not true that it’s easy to do.
In the book Think, Act, and Invest Like Warren Buffett, written by Carl Richards and Larry Swedroe, the authors maintain that anyone can achieve Buffett’s returns, but to do so you have to act and think the way he does. Carl Richards says there are 2 basic rules that Buffett follows and individual investors don’t. And that is what leads them to mediocre investments or losses on the stock market.
Why don’t individual investors do it like Buffett?
First, they don’t follow one of the many pieces of advice Buffett offers: ignore forecasts and analysts.
Buffett says that most investors buy shares because the major media outlets or analysts recommend them. By the time that happens, you’re already too late, not to mention that analysts are wrong 40% more often than the weatherman. In Buffett’s view, you would do well to ignore forecasts, price targets and everything to do with the world of fortune tellers, because predicting the future is not his business.
Stock market analysts and fortune tellers won’t help you spot an undervalued company.
The other mistake is the investment strategy, along with the time horizon. Many investors try to get ahead of the market by trading too much. Part of the success of Buffett’s investments is his time horizon: for him, the shares he buys are forever, which is why, when their price falls, he takes advantage of the bargain to buy more. With price appreciation, dividends and the growth of the company’s business, beating the market shouldn’t be hard. (Read: How to build a dividend investing strategy and earn more than 10% a year.)
For Buffett, inactivity in stock market investing and avoiding excessive diversification are two smart investor behaviors.
(Read: Warren Buffett’s 16 best pieces of investing advice)
Investors also lack the discipline and temperament to buy shares when valuations are excessively low. Following the herd is what leads individual investors to end up wherever the herd ends up.
Of course, there is one thing in which you can’t compete with Warren Buffett: because of his size in the investment world, he gets investment opportunities that are not offered to other investors. Not to mention that Buffett has the advantage that when he invests in a company and the market finds out, the stock shoots up. Apart from those two small details, the truth is that anyone can invest like Buffett. But, as I said at the start, you can’t get Buffett’s results while making the mistakes he advises against.
Further reading
Featured image: Photo by CEphoto, Uwe Aranas or alternatively © CEphoto, Uwe Aranas, CC BY-SA 3.0, via Wikimedia Commons.
