Warren Buffett is undoubtedly the greatest investor of all time. No other individual has come anywhere near as close at replicating his investment performance over an ultra-long (50+ years) timeframe. His holding company Berkshire Hathaway has, since 1965, generated an average annualised return of 20%, equating to a cumulative performance of 2,810,526%.
I am not looking to replicate anything on that scale; but then I don’t need to in order to be a successful investor. Although Buffett never recommends which stocks to buy, his annual letters to Berkshire Hathaway’s shareholders, together with his many publications, provide me with the inspiration to help me become a better stock picker.
A good temperament is the key quality of a successful investor, not intellect
It might not be Buffett’s most recognised words of wisdom but to me they are some of the most important. Buffett goes on to state: “You need a temperament that neither derives great pleasure from being with the crowd or against the crowd.”
Today, with the likes of the infamous “meme stocks” and the Reddit crowd, following what everyone else is doing might seem to be the easiest and quickest way to make money. For some individuals who invest early, it can lead to riches; but for the vast majority of retail investors, it leads to loss of capital. For individuals unfortunate enough to invest at the very end of a business cycle, those losses often become permanent as a wave of creative destruction sweeps away parts of the old economy.
Remember, at the height of the tech bubble in early 2000, the era of the internet was only just beginning but that did not stop the Nasdaq composite losing 78% of its value. When a market is running on fumes, like arguably it is today, then I will be “fearful when others are greedy”, for it is “only when the tide goes out, do you discover who’s been swimming naked”.
For me, temperament and conviction are two sides of the same coin. If I have done my research into a particular company or sector and decide to invest accordingly, then I will stay the course. If my picks fall out of favour or even crash, then, unless new evidence emerges which requires me to re-evaluate my original thesis, I will pay no attention to the day-to-day stock price moves. Indeed, I will consider adding to my positions.
Margin of safety
Often touted as the three most important words in investing, the ‘margin-of-safety’ concept was a key tenet of Benjamin Graham’s (Buffett’s mentor) core investment philosophy. As Graham explains: “The margin of safety is always dependent on the price paid. It will be large at one price, small at some higher price, nonexistent at some still higher price.”
From a practical standpoint, the margin of safety can most easily be understood by applying it in everyday life situations. We all know that it is important to have a buffer of cash to cover an unexpected job loss, or fix a broken-down car etc. It’s no different when buying stocks: my predictions for the future cash flows of a particular business does not need to be right for me to see a decent return on my investment, if I have a good margin of safety.
For me, a margin of safety is most profound during a stock market crash. At this point, I remember another one of Buffett’s words of wisdom: “Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble.”