Replicating the huge success that Warren Buffett has had in investing is difficult. The Berkshire Hathaway CEO has an unrivalled skill in identifying opportunities. But there’s a really important part of his approach that investors like me *can* emulate.
Once invested, Buffett likes to hold onto companies for as long as possible — ideally forever — rather than selling them when the share prices increase. This accounts for a lot of the Oracle of Omaha’s investing success. And there’s no reason why I can’t do it too.
Investment returns
Buffett thinks of owning stocks as having a stake in the underlying businesses. Accordingly, he looks at the cash a business produces as the return on his investment.
| Earnings per share (EPS) ($) | 2012-13 | 2013-14 | 2014-15 | 2015-16 | 2016-27 | 2017-18 | 2018-19 | 2019-20 | 2020-21 | 2021-22 |
|---|---|---|---|---|---|---|---|---|---|---|
| Bank of America | 0.25 | 0.90 | 0.42 | 1.31 | 1.49 | 1.56 | 2.61 | 2.75 | 1.87 | 3.57 |
| American Express | 3.89 | 4.88 | 5.56 | 5.05 | 5.61 | 2.99 | 7.91 | 7.99 | 3.77 | 10.02 |
| Moody’s Corp | 3.05 | 3.60 | 4.61 | 4.63 | 1.36 | 5.15 | 6.74 | 7.42 | 9.39 | 11.78 |
This is why it’s important to hold onto businesses that grow their earnings. Take Bank of America as an example. If I’d bought shares at the start of 2012, I’d have an investment return of $0.25 at the end of the first year.
At the end of the next year, I’d have another $0.90 to go along with it, taking my total return to $1.95. And by the end of the decade, my investment return would have reached $16.73.
If I’d sold my shares after five years, though, things would have been very different. After five years, my shares would only have produced $4.16. In other words, by selling my shares instead of holding them for another five years, I’d be leaving $12.57 (around 75% of the EPS) behind.
The story is the same with American Express and Moody’s. In the case of American Express, selling after five years would have involved missing out on 58% of the earnings. And with Moody’s, I’d be foregoing a huge 70% of the earnings.
Conclusion
Holding on to good businesses, rather than selling them, is an important part of Warren Buffett’s success. Companies that can grow their earnings over time produce much more in the later years than they do in the earlier years. Selling early involves sacrificing most of the investment return.
This is why Warren Buffett has made 99% of his fortune after his 50th birthday. Staying the course with good investments and giving them time to work has allowed him to benefit from the growth of the businesses that he owns.
Emulating Buffett’s success in the stock market isn’t going to be easy. But there’s no reason that an investor like me can’t follow his lead in holding on to quality businesses and benefitting from the effect that has caused the Oracle of Omaha’s wealth to skyrocket later in his career.
