Be highly selective, buy great companies and buy them at reasonable prices.
That is Warren Buffett’s secret of success and advice to investors.
Sounds simple and straightforward enough. But a recent Financial Times column raised a very interesting point.
“After years of Mr. Buffett sharing his ideas with the world, no one has yet managed to truly compete with him. This proves how unique he is,” writes Miles Johnson.
The fact is, identifying great companies is inherently difficult, let alone great companies that are available at reasonable prices.
It is not just about the ability of the money manager, but also about their professional and psychological constraints, Johnson points out.
To successfully execute Buffett’s strategy, one may have to wait in patience for months, even years for the right opportunity to come up.
However, fund managers can hardly justify their annual fees for not doing anything over an extended period of time.
Johnson also wonders how many fund managers can develop the discipline to wait for those rare, perfect buying opportunities, even if they do not have to worry about customers pulling money out of their funds.
The recent Wells Fargo saga may further discourage investors from following the Warren Buffett way.
Buffett holds a 10 percent stake in Wells Fargo, making him the bank’s biggest shareholder.
Still, he has misread the bank for years and failed to notice the lender’s fake account malpractices.
As unique as Buffett is, he is not error-proof.
So for someone who is far less capable and resourceful than Buffett, the chance of betting big on the wrong company is likely to be much higher.
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CG