The Buffett Myth

Why None Have Succeeded

Hi all,

Slightly different post than usual today.

With recent discussion on Ackman’s attempted purchase of Howard Hughes to form the modern-day Berkshire, I thought I would share my view on why millions have attempted to emulate Buffett but none have succeeded.

1) The Buffett Today is Not The Buffett of Yesterday.

Buffett’s portfolio today is a far cry from the one that propelled him to be the richest investor of all time.

A young Warren Buffett was a heavy buyer of net-net stocks, allowing him to multiply his money quickly in an imperfect information environment. In fact, Buffett claims he could grow his portfolio at 50% if he were just operating with a few million dollars.

To find huge discounts, Buffett combed through Moody’s stock manuals, page by page, multiple times. That was his edge.

However, market structure has changed massively. In the earlier decades, financial markets were less efficient, allowing Buffett to exploit clear mis-pricings in the market. Today, with HFTs, Hedge Funds etc… traditional value investing is far more competitive.

2) Buffett’s Strategy Evolved Over Time

Many investors look at Buffett’s current portfolio - large, stable, cash-generating businesses like Apple, Coca-Cola and American Express - and assume that's the key to his success. But that is not how he built his fortune.

• Young Buffett focused on deep value investing, purchasing net-net stocks, or what was known as “cigar-butt” stocks, cheap companies with a little bit of value left.

• Middle-aged Buffett shifted his focus to quality investing under the influence of long-time friend Charlie Munger, who advised him to purchase “great companies at fair prices” rather than “fair companies at great prices”. Buffett targeted businesses with strong moats, predictable earnings, and durable competitive advantages.

• Today, Buffett’s portfolio consists of over 50 stocks. He focuses on capital allocation, purchasing large and dominant businesses with pricing power and re-investing Berkshire’s cash flows.

To be the modern-day Buffett, one must focus at what the market demands now, not what the market demanded 50 years ago.

3) The Buffett Edge: Structural and Time Horizons

Buffett’s success is built on a structure that very few investors can replicate.

• Permanent Capital from Berkshire Hathaway: Unlike hedge funds or mutual funds, Buffett does not face investor redemptions, allowing him to hold stocks indefinitely. This long-term horizon enables him to weather market volatility without being forced to sell.

• Cheap and Consistent Leverage (Float): Buffett’s access to low-cost capital from Berkshire Hathaway’s insurance business gives him a funding advantage that retail investors and fund managers lack. This allows him to compound returns at a rate unavailable to most.

Most investors who grow their funds to multi-billion dollar portfolios are limited by liquidity constraints and shorter time horizons. The picture below sums it up:

4) Rationality, Psychological Discipline and Contrarian Thinking

Buffett stays rational and contrarian in extreme market conditions, setting him apart from ordinary investors.

Buffett buys when fear is high and sells when greed takes over, this is easy to say but a mindset that investors struggle to maintain when the situation arises.

Buffett avoided dot-com stocks in the late 1990s, when even the best investors succumbed.

See what Druckenmiller, the legendary investor himself said:

I made a lot of mistakes, but I made one real doozy. So, this is kind of a funny story, at least it is 15 years later because the pain has subsided a little. But in 1999 after Yahoo and America Online had already gone up like tenfold, I got the bright idea at Soros to short internet stocks. And I put 200 million in them in about February and by mid-March the 200 million short I had, lost $600 million on, gotten completely beat up and was down like 15 percent on the year. And I was very proud of the fact that I never had a down year, and I thought well, I’m finished.

So, the next thing that happens is I can’t remember whether I went to Silicon Valley or I talked to some 22-year-old with Asperger’s. But whoever it was, they convinced me about this new tech boom that was going to take place. So I went and hired a couple of gunslingers because we only knew about IBM and Hewlett-Packard. I needed Veritas and Verisign. I wanted the six. So, we hired this guy and we end up on the year — we had been down 15 and we ended up like 35 percent on the year. And the Nasdaq’s gone up 400 percent.

So, I’ll never forget it. January of 2000 I go into Soros’s office and I say I’m selling all the tech stocks, selling everything. This is crazy…at 104 times earnings. This is nuts. Just kind of as I explained earlier, we’re going to step aside, wait for the next fat pitch. I didn’t fire the two gunslingers. They didn’t have enough money to really hurt the fund, but they started making 3 percent a day and I’m out. It is driving me nuts. I mean their little account is like up 50 percent on the year. I think Quantum was up seven. It’s just sitting there.

So like around March I could feel it coming. I just — I had to play. I couldn’t help myself. And three times the same week I pick up a — don’t do it. Don’t do it. Anyway, I pick up the phone finally. I think I missed the top by an hour. I bought $6 billion worth of tech stocks, and in six weeks I had left Soros and I had lost $3 billion in that one play. You asked me what I learned. I didn’t learn anything. I already knew that I wasn’t supposed to do that. I was just an emotional basket case and couldn’t help myself. So, maybe I learned not to do it again, but I already knew that.

Even a disciplined investor like Druckenmiller succumbed to herd mentality. Buffett, however, is as disciplined as they come. He has an emotional detachment from his investments and thinks independently from media narratives and market sentiment.

This sets him apart from even his most accomplished peers.

Conclusion:

There are likely many more reasons that we have yet to see another Buffett. Perhaps he is out there, just compounding. But until that day, I think we should appreciate Buffett and learn as much from him as possible.

I hope this sharing has helped. If you did enjoy it, share it with a friend!

Until next time!

-Gab

Disclaimer: The content presented is for informational and academic purposes only and does not constitute financial advice. The analysis and opinions expressed are based on research and should not be interpreted as a recommendation to buy, sell, or hold any security. Readers should conduct their own due diligence and consult with a qualified financial advisor before making any investment decisions.