The Warren Buffett Approach
I hate to crush anyone’s dreams but sometimes realism is simply a better catalyst for accomplishment than groundless euphoria. Let’s face it. You probably will never be like Warren Buffett. Unless, that is, you can read like a maniac.
Want to try to be Warren Buffett? When you wake up tomorrow morning grab a copy of Forbes and read it from front to back, followed by Wall Street Journal, Financial Times, New York Times, USA Today, Omaha World-Herald, and the American Banker (Crippen, 2007).
Crippen sums up the obvious: “Needless to say, he’s a fast reader.”
Still think you can be Warren Buffett? I didn’t think so. This daily reading list doesn’t even include the stack of SEC filings and annual reports he reads from front to back.
So let’s wake up and embrace our inferiority. Now a question stands right in front of us. If we can’t be Warren Buffett, can we still earn returns like Warren Buffett?
From 1965 to 2010 (45 years), Buffett’s Berkshire Hathaway shares have increased per-share book value at an average annual rate of 20.2% while the S&P 500 (with dividends included) has increased only 9.4% per year (2010, Berkshire Hathaway Annual Report).
This isn’t even including Buffett’s market crushing partnership returns before Berkshire Hathaway. His performance has been phenomenal and is simply unmatched. So the question remains: Can we earn market-crushing returns like Warren Buffett without being Warren Buffett?
Four Hour Investing
Perfection is achieved, not when there is nothing more to add, but when there is nothing left to take away -Antoine de Saint-Exuper
If Timothy Ferris, author of The Four Hour Work Week, were a value investor, I think he might believe achieving Buffet-like returns is possible.
For those of you who are Timothy Ferris fans (or haters) you know about his minimum effective dose (MED) philosophy. Ferris has dedicated the majority of his working life to putting forth the minimum effort for maximum results. Avid readers of his books, blog, and forum will conclude that Ferris is definitely on to something. In fact, I’ve been experiencing MED results first hand for the past month.
I’ve been implementing a compromised version of his Geek-to-Freak workout to put on some muscle on this awfully skinny body of mine the last 4 weeks. With only 2-3 workouts a week I’ve gained 7 1/2 pounds of muscle in 28 days–not bad for following the plan even with some compromise.
How does Ferris get more results out of less work? By working smart and not hard. Armed with hours of experimentation, trial and error, and the latest findings, Ferris is able to build on the work of others to accomplish just as much or more than others with less work.
This imposes a question for us value investors: Can we take the loads of investing information and plethora of investing services and tools and use them to our advantage, saving us time and labor? Can we earn Buffett returns by utilizing, disseminating, and interpreting the information that is provided to us by those who have already done most of the hard work for us?
Introducing: MED Investing
The modernization of the world and increased competition from a global economy is probably putting demands on your time. And, unfortunately, time doesn’t care about your problems. Time is unforgiving. You better learn to make the most of your time or you just might get left behind. As investors, therefore, we face a dilemma. We want to earn satisfactory returns on our hard earned money, yet what’s the point if it eats up all of our time? I think that it is time we consider MED (minimum effective dose) Investing. Is it possible?
I don’t have any hard facts for you about why (or even if) MED investing works, but, really, we have no choice but to give it a shot (unless you are Warren Buffett). So what weapons would the MED investor need in his or her arsenal?
- Time management skills. If you’ve never read it, pick up a copy of Timothy Ferris’ The Four Hour Work Week. Though everything in the book might not apply to you, you’ll probably find some nuggets that will make your life much easier. My personal favorite? Baching.
- Old School Value spreadsheets. Jae Jun explains the benefit of his spreadsheets with accuracy: “How would you like a full time stock analyst, working for you?” With OSV spreadsheets you can get the ratios and valuation methods you care about, all calculated for you in just a matter of seconds. OSV spreadsheets, combined with a basic understanding of value investing, will make investing much easier and save you an incredible amount of time. They are, without a doubt, the best valuation spreadsheets available.
- Bloomberg Businessweek Magazine. Bloomberg Businessweek is published weekly. Its content is entertaining and, more importantly, will expand your horizons and business acumen, keeping you on the learning curve. The best way to better understand businesses is to read about them. Bloomberg Businessweek will keep you business savvy. Its cotent is completely relevant for investors. Good investors are voracious readers. You can’t go wrong here.
- Motley Fool. If you haven’t joined this Foolish group of investors, I don’t know what’s stopping you. The Motley Fool Stock Advisor service pays for itself. Every month you’ll receive two new, thoroughly researched stock recommendations for your consideration, in addition to one of the best advisor newsletters ever to be published. The Motley Fool community is large and active. Motley Fool helps investors keep their heads on straight. If anyone focuses on the business as opposed to the stock, it’s Motley Fool. They have a reputation of buying great businesses and rarely selling. It’s a strategy that’s worked extremely well for them as they’ve crushed the market since inception.
- Morningstar. Morningstar offers extensive financial information on stocks. It has brought all the information you need for an investment together in a user-friendly format, helping investors make better investment decisions. There is plenty of information available for free at Morningstar, including its star rating system of many stocks which can sometimes help give you confirmation in your investment choices. But their Premium membership is worth the money. This is another service that pays for itself. With the premium membership you have 10 years of financial data at your fingertips and Morningstar’s reports with Buffett-like analysis. Morningstar’s analysts take a fundamental approach and have done all of the hard work for you. These reports will not only help you get a better picture of a potential investment, but the analysts write in an educational manner, helping you improve your stock analysis skills. Plus, Morningstar Stock Investor Picks Have Beaten the S&P 500 during the last 8 years. If you don’t want to fork out the cash for a premium account, the free one is still fantastic.
Today I’m sitting in the Green Bean (the Starbucks of the desert) with my M-4 sitting at my side. As I look around, it looks like there are about 25 people with at least 4 different types of weapons in this coffee shop. All of us carry live ammo. We don’t know each other, but we trust each other. We trust each other with these weapons because we know that we all have had to train and become proficient with these weapons in order to carry them around like this. We’ve been schooled in accountability and watched those who dare do the wrong thing with their weapon experience serious punishment under the Uniform Code of Military Justice. The same goes with these investment tools. It is one thing to know they exist, but it is another to become proficient at using them.
I encourage you to take inventory of your arsenal. What do you have available at your fingertips? Are you effectively honing your investment weapons? When that opportunity comes you need to be ready to pull the trigger. On the other hand, you need to be well trained so you don’t commit fratricide.
Just as technology has made communication easier than ever, technology has presented investors with an opportunity to earn better returns with less labor.
So to answer our question, you don’t have to be Warren Buffett to earn Buffett-like returns. You only need to be the master of the information and tools at your fingertips.
Disseminate, filter, and utilize them wisely.
What weapons are in your arsenal?