VALUE INVESTING
Why You Should Forget Warren Buffett

By Stephen Bland (TMFPyad)
December 13, 2002

A well-worn route to learning about investing is the advice to study some of the many books available by or about the big and famous investors. Spend a few quid and you can too can become Warren Buffett. Only you can't of course.

Ever wonder why this may be so? I have, many times, and have written previously on the Motley Fool of my reason: you cannot learn the natural instinct possessed by such people and, although their successful approaches may seem in the books to be pretty formulaic and consequently capable of emulation by almost anyone, it just doesn't work that way in practice.

There are no armies of billionaire share investors. There is a bit, the bit that makes the difference between being outstandingly successful and merely reasonably successful, between making enormous sums and making merely enough to make yourself pretty comfortable, that just cannot be put into books.

You've either got it or you haven't and damn near everyone will fall into the latter category. The great majority of small investors will never make decent money out of the market. They lack strategy, discipline and they lack the appetite for risk. By decent, I mean such sums as will at some stage, usually later in your life, be sufficient to generate an income upon which you could live comfortably. If you can do that or anywhere near it you are beating most everyone else in the market.

For example, say yields are at 5%. Assume you need at current levels a clear £25,000 a year from your investments. The capital required is therefore £500,000 and will have to remain that sum in real terms for any future projection.

Now the average small guy is never going to make anything like that kind of money over a long period by starting with modest sums. But as far as I can see, following Warren Buffett for example, is no help, more like a passport to losing money. By trying to follow Warren Buffett you are not following Warren Buffett because he makes money and 'WB' followers -- from my experience -- don't.

The problem is that the Buffett investor is aiming too high. Without ingredient X, it is a dead end. What our little guy needs to do is to aim for a kind of skilled mediocrity. To go for the smaller, but at least potentially achievable investment returns over time. Some strategy that is likely to work realistically for him.

What I'm saying is that you will never make billions. Forget it. You just weren't born that way and in any event the methods to do so differ from that required to make your comfort level. But you might stand a chance of becoming comfortable by adopting an approach that does work. If you make a few hundred grand out of the market, you will already be in a minuscule minority of private investors. Doing that ranks as seriously brilliant in the history of the small guy.

It is no accident that as far as I have observed, the most commonly successful approach to making serious but achievable money is some variation on the value theme that you can make work for you personally. This basic idea seems to me to underlie nearly everyone who has famously made money in the stock market although as I say, certain famous investors' approaches just don't work in general.

The tales of money being made in other ways than value are by far the exception. Yes there will be a handful that made money out of long-term hold growth shares of the tech or similar kind. The stories of old ladies who after their death are revealed to be worth millions because they hung on to one great growth share for fifty years. A lot of that will be blind luck. There might even be a tiny few who make money out of trading shares with technical analysis. But these investors pale into insignificance besides the number who have won with some form of value I think. Even some highly simplified version like the long-term hold high yield portfolio, pumping money into it regularly if you haven't a large sum to start, and reinvesting the dividends. You don't need to be a stock market wizard to do that. You just need the faith, the discipline, the risk profile, the perseverance and probably a tiny bit of selection nose too I guess. Do this long term and I am convinced you will leave most investors standing. But you have to be willing to take the risk that it might not work out that way.

I'm not one for those corny stock market aphorisms, some of which are incorrect in my view as I mentioned in an article recently, but one does ring true: buy cheap and sell dear. That encapsulates fundamental value. What other approach tells you when a share is "cheap?"