You Are No Warren Buffett

Neither Am I, That’s OK

Before starting to invest, many of us have googled ‘how to invest like Warren Buffett’. The successful billionaire makes investing in stocks look so easy. The reason for this is his simple recipe for success is: buy quality businesses with long-term intrinsic value. Don’t seek instant gratification and be patient. If we want to make big money we believe it’s crucial to mimic smart investors, buy the stocks they do and ergo become rich too.

The reason you’re not earning spectacular returns is, you’re not Warren Buffett, and neither am I.

We have a morbid propensity to mimic the most successful professionals. We desire their success and achievements without realizing it’s a threatening trap. They’re rare outliers and earn unusually high returns on their investments. They’re unique and adept because of their decades of experience and expertise. The same applies to experts in other fields too. Be it Ray Dalio or Michael Jordan.

Congratulations, you’ve unknowingly fallen into the trap of survivorship bias.

Survivorship bias is universal. However, in this case, it occurs when people overemphasize on the existing winner or survivor stocks that are more visible in the market and neglect the underperformers due to invisibility. This has a significantly negative impact on the performance as capitalists may trade at unsuitable prices. Thus, prompting them to make unsound investment decisions based on press releases which overestimate returns on some funds.

In order to overcome survivorship bias, it is crucial investors don’t mimic a couple of strategies that have formerly proven successful for other investors. That will result in failure and poor decision making. To reduce your risk of failure, don’t omit any observations and analyse underperformers. They provide much more valuable information. Also, rather than pursuing hot stocks, realize these tactics are tax-inefficient and demand substantial transaction costs.

If you really want to invest like Warren Buffett then like him you need to fall in love with the companies you invest in. Apart from being a value investor Buffett evaluates selected businesses and knows which are under or outside his competence. He’s a learning machine and a voracious reader who succeeds on his own terms. Similarly, you need to fathom your investing style, interests, and unique capabilities that’ll help you be a better investor.

The greater risk comes from investing in businesses you don’t understand. If you’re prepared for it, then it’s not a risk. As Adam Smith quotes in ‘The Money Game’, “the first thing you have to know is yourself. If you don’t know who you are, the market is an expensive place to find out”.

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