🌳 Invest like Buffett

Hey hey, happy Monday.

Warren Buffett just announced he’ll be stepping away from his role as CEO at Berkshire Hathaway. It’s the end of an era for the most prolific investor in history.

Buffett may be heralded as a god on Wall Street, but he amassed his fortune in a surprisingly simple — and attainable — way. So as the world praises his stock-picking acumen, I thought we’d examine the more impactful side of how he became a billionaire.

If you have a spare half-hour on your hands today, tune into my conversation with Brian Sozzi on Yahoo Finance’s Opening Bid podcast. We chatted about running shoes, the AI trade and bond market blowups. Brian is one of the best to do it, and we had a lot of fun.

Also, the Compound gang is coming to Chicago! Join me and a few of my nerdy colleagues at the Chop Shop on June 3 for a live taping of The Compound and Friends, including a special appearance from Morningstar CEO Kunal Kapoor. Buy your tickets here and holler at me if you’ll be there, I’d love to say hi!

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Everybody has a Warren Buffett story.

Here’s mine.

As a kid, I’d grab the local newspaper off the porch (s/o to the Burlington Times-News), plop it on the kitchen table, and read it front-to-back over a bowl of frosted Cheerios.

A newspaper. You know, that rolled-up piece of ink-stained industrial paper that people used back in the day to keep up with local and global news. That old relic.

Reading the newspaper became a daily ritual. I’d flip to the local news section and read about all the local crimes, weddings, obituaries, and business openings. All the juicy stuff. From there, I’d jump to the real estate section to ogle at fancy houses, and then I’d land on the markets page.

The markets page was a lot for an eight-year-old to take in. Think thousands of tickers with lots of numbers and arrows. I liked scanning through the list for familiar brands (Walmart! Johnson & Johnson! McDonald's!). But the stock price of one strangely named company always grabbed my attention.

The company was Berkshire Hathaway, and the share price was five figures. About $57,000 — a fortune compared to Walmart’s $17 or McDonald’s $43 at the time.

One day, I asked my dad why Berkshire’s stock price was so much higher than the rest. I can’t remember exactly what he said, but it was something along the lines of “it’s Warren Buffett’s company, and he’s done really well for himself”.

I didn’t understand the concept of Berkshire. Or even the stock market, really. But I was enthralled by the $57,000 price tag. That’s a huge number, I thought. Whoever has $57,000 must be super rich.

At that point, I was starting to understand how life was a game of numbers, and everything has a price. A dollar for that tooth under your pillow, $5 for a hot dog at the pool, $20 for the field trip to the science museum.

It’s funny how your mind works in pennies as a child. Then, one day, you grow up to learn that the world deals in dollar. Tens of thousands, millions and billions of dollars.

Complicated transactions, contentious conversations, hair-raising leverage. The untouchable big money world that is Wall Street.

To many people, Warren Buffett is Wall Street. The king of American capitalism, staring down at us mere plebeians from his ivory tower of investing superiority and ultra-expensive share prices.

Turns out that couldn’t be further from the truth.

On May 3, Buffett announced that he’d be stepping down as CEO of Berkshire Hathaway at the end of the year. He slipped the announcement into the very end of an hours-long Q&A with shareholders, almost like he wanted to get it on the record with the least amount of fanfare possible.

Buffett deserves all the flowers. In the past week, people have praised his business acumen, his dedication to his craft, and his ability to strategically nurture his companies into rock-solid dynamos of their respective industries.

We all know the Warren Buffett that always had his nose in an annual report or loan schedule. From that perspective, he was 100% Wall Street.

But the key to his investing philosophy was surprisingly simple.

He held good companies for a very, very long time.

Let’s take Berkshire’s top five holdings.

Five well-known, blue-chip companies that he’s owned for an average of 19 years.

He bought Coca-Cola back in 1988, a few months after the treacherous Black Friday selloff of 1987. Americans were historically despondent about the stock market, and who could blame them? A 20% one-day drop can really mess with your head.

Coca-Cola fared worse than the market, too. The stock dropped 42% from August to October of 1987, and was about 30% below its high when Buffett bought in. Buffett defended his decision in the 1989 shareholder letter by saying “our favorite holding period is forever”. Forty years and 2,900% in gains later, he’s kept his word.

Same story with American Express. Buffett originally invested in American Express back in the 1960s, after its warehousing arm was tied up in a strange-but-serious salad oil scandal. The stock dropped 50%, and Berkshire held a large position for a few years before winding it down. Buffett bought into American Express again through preferred shares in 1991 after the company’s failed attempt to become a financial giant. Those preferred shares converted into common shares in 1994.

Wall Street obsesses over the “good companies” part of Buffett’s strategy.

Lots of investors have tried to replicate Buffett’s incredible knack for stock-picking. Most people suck at it, and nobody comes close to Buffett. Less than half of professional investors have beaten the stock market in recent years, and they literally get paid to do just that. 

Less appreciated, however, is how time has contributed to Buffett’s success.

There’s picking the right investment, and then there’s the part where you grit your teeth and hold on for dear life through the ups and downs before selling at the right moment.

Buffett was the king of both.

Consider this: Buffett’s net worth has skyrocketed to $162 billion, or 80 times what it was when Berkshire shares went public in November 1987.

That level of wealth didn’t all come from stock-picking. Berkshire’s stock has increased 16% a year since then, eight percentage points more than the S&P 500’s return. Sure, eight percentage points of outperformance is a formidable lead to sustain for decades. But if he had invested in a hypothetical, no-fee S&P 500 fund in 1987, he’d still be sitting on $46 billion today.

We talk a big game about how we’re investing for retirement, generational wealth, or insert lofty long-term goal here, yet the holding period for New York Stock Exchange-listed stocks has averaged less than 12 months for much of the past two decades.

We worship Buffett, but we’re acting less and less like him.

Because holding sounds simple, but it’s incredibly difficult in practice.

For one, your brain is wired to run away from risk. To stop touching the hot stove, even when the acceptance of some uncertainty can lead to greater returns down the road.

Not only that, but our high-information, instant gratification society is the perfect recipe for rash decisions. A simple, boring approach to building wealth exposes you to temptation. Ways to get the biggest return today, not consistently good results over long stretches of time. Home runs that eventually lead to blown-out shoulders.

On top of all of this, you have to be resilient in the face of economic crises, technological changes, financial priorities and random, inexplicable events that boggle the mind. 

Staying invested is easier said than done. But it’s refreshingly attainable.

Warren Buffett is the antithesis of the stereotypical Rolex-wearing hedge fund managers who outsmarted markets through complex, unachievable strategies. The opposite of the complex, intimidating markets section in the newspaper that introduced me to Wall Street.

A simple, unassuming investor who didn’t try to galaxy brain the fundamentals of wealth-building.

You don’t have to be an expert stock picker or scour a 10-K.

You just have to do less for an extraordinarily long period of time.

Thanks for reading!

Callie

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