There is no shortage of articles about Warren Buffett, the oracle of Omaha. He is arguably the most successful investor in human history.
Many people have tried to explain Buffett’s success, stock picking methodology, strategies, tactics, etc. Even though Buffett is intelligent in finance, I do not think this is his secret to success, as implied by his advice:
“…don’t do equations with Greek letters in them”
“You don’t need to be a rocket scientist. Investing is not a game where the guy with the 160 IQ beats the guy with 130 IQ.”
I will tell you, what I think, is his secret to success:
Here is a quote from Buffett that resonates with me:
“The Stock Market is designed to transfer money from the Active to the Patient.”
In April, 2009, I bought 9-10 stocks that were very very undervalued. After recovering over the past five years, some of them have gone up 1,000% to over 3,000%. Even though I made a lot of money from these stocks, I did not make 1,000%. This was due to impatience. One of the stocks that I bought was Macquarie Infrastructure (MIC) for approximately $2 per share. When my other stocks were going up, MIC was not. Then it will go up and come back down. After a few months, I lost patience with MIC so I sold it. MIC is currently trading at approximately $72. If I had the patience, I would have had a 35 bagger. (A one bagger is when you make 100% return.) Another stock was Las Vegas Sands (LVS), which I bought for more than $4. It went up in the first half of 2009, but it was volatile, so I lost patience and let myself get whipsawed out. LVS is currently trading at approximately $62. I would have had a 13 bagger. I made money on both of these stocks, but not nearly the amount that I could have made if I had patience. A lot of money was “transferred” out of me.
Even though two of the stocks that I bought in 2009 went to zero, that portfolio would have gone up by approximately 1,200% if I had patience and held on to the same stocks. This is 1,200% for the portfolio, not any one particular stock.
Here are other quotes from Buffett that make me believe that, of all of the skills that he has, patience is the most important:
“Always invest for the long term.”
“Buy a business, don’t rent stocks.”
“If you don’t feel comfortable owning something for 10 years, then don’t own it for 10 minutes.”
“I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for ten years.”
“We don’t get paid for activity, just for being right. As to how long we will wait, we’ll wait indefinitely.”
“Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.”
“Our favorite holding period is forever.”
“Unless you can watch your stock holding decline by 50% without becoming panic-stricken, you should not be in the stock market.”
“We like to buy businesses, but we don’t like to sell them.“
“The more you trade, the more you underperform.”
“Successful Investing takes time, discipline and patience. No matter how great the talent or effort, some things just take time: You can’t produce a baby in one month by getting nine women pregnant.”
“In the short-term, the market is a popularity contest. In the long-term, the market is a weighing machine.”
Another aspect to Warren Buffett’s success is the lack of diversification. That’s right. Do not diversify for the sake of diversifying. This sounds counter-intuitive. It is definitely against industry norm. Diversification has been drilled into retail investors for decades. The first thing that most retail investors care about is diversifying his/her portfolio. Hence, they buy mutual funds, ETFs, fixed income or dozens of stocks. See Allocate 100% to Stocks and My Portfolio, to see my lack of diversification and Warren Buffett’s quotes on this topic.