Maybe He’s Just Lucky? Why You Shouldn’t Imitate Warren Buffett
Hello dear,
I want you to imagine a dark, distant past (before this finance series). What would you do if you wanted to learn about investing?
Let’s say you Googled “best books on investing.” You’d probably find the same book recommended over and over again.
In fact, try this today. Ask a “finance-savvy friend” to recommend a book on investing.
My bet is she’ll recommend this one: “The Intelligent Investor: The Definitive Book On Value Investing” by Benjamin Graham.
I’m sure you’ve heard about it.
Why? Because everyone interested in investing has heard about it.
Why? Because Warren Buffett said this book changed his life.
“Well if it worked for Buffett, surely it will work for me. Right?”
Wrong.
You can’t forget all the other factors that contributed to Buffett’s success:
- His IQ is probably above 150.
- He started selling things and saving money while in high school.
- He bought his first stock at age 11.
- His finance teacher in college was Benjamin Graham.
- His business partner is the infinitely wise Charlie Munger.
And many, many other factors (which you can read about in his biography aptly titled “The Snowball” by Alice Shroeder).
Graham’s book is as likely to turn you into Warren Buffett as Nike soccer cleats are likely to turn you into Cristiano Ronaldo.
It doesn’t work that way.
Don’t Try To “Invest Like A Pro”
Why mention Graham’s book and Buffett?
Simply, I picked a popular example where people think copying a “pro” will magically turn them into one.
Today, I want to exterminate that silly idea from your head.
Sidenote: Of course, this doesn’t apply to everyone investing full-time (although it does apply to most). If you’ve lived and breathed the stock market since you wore diapers, there’s a 0.01% chance you’ll become very, very wealthy by doing things I don’t recommend.
What is a “Pro”?
First, you need to understand what I mean by “pro” investor.
I mean the best in the world. You know, those you see on the cover of magazines.
This simple chart (based on this post from MMM) will give you an idea :
In trying to beat the market, most people get a smaller return (placing their own bets) or lose money (mainly because of the fees they pay to third parties).
The market returns an average of 7% every year. Hence why I recommend buying the market through Index Funds. This way, you’ll beat the majority of investors.
However, there is a small, minuscule, tiiiiiny group of people who manage to beat the market consistently over a long time.
Here are some of them: Warren Buffett, Ray Dalio, James Simons, Carl Icahn, David Swensen, Paul Tudor Jones II, Mary Callahan Erdoes, T. Boone Pickens, Kyle Bass, David Einhorn, George Soros, Marc Faber, Peter Lynch, Bill Ackman, Alwaleed Bin Talal, and Charles Schwab.
These are the “crème de la crème,” the superstars, the Navy SEALs, AND the Unicorns of the financial world.
They (and only they) beat the market. Hence why they’re rich and famous.
Feel free to click on each name. There is a lot to learn from this amazing group (but “how to invest part-time” isn’t one of them).
5 Reasons Not To Copy The Pros
1. Speculating is a zero-sum game
I know an army of people will disagree with me on this point, but hear me out.
If you are speculating, the stock market is a zero-sum game.
Why? Because when you buy a stock at a specific price, someone else is selling it at that same price. If you were right to buy, they were wrong to sell (and vice versa).
In this game, for you to perform better than average means someone else has to perform worse.
If the only people performing better than average are the above-mentioned Unicorns, guess who’s performing worse? YOU.
“There is a world game going on, and only a handful actually make money, and they make a lot by taking chips from the players who aren’t as good.” — Ray Dalio
2. They all invest differently
If you study the above Unicorns, you’ll quickly notice one thing:
They all have completely different investing strategies!
Now, do you see why thinking “one book will teach you how to beat the market” is nonsense? (anyone who tells you differently is either delusional or trying to sell you something).
It gets worse. You only think their strategies work because you saw how it worked for them.
However, you don’t see the countless people who tried to emulate them and lost.
So, not only do they use different strategies, but those strategies aren’t the sole reason for their success (copying their strategy means you’re missing the point).
3. They’ve put in 10,000 hours
Warren Buffett bought his first stock at age 11. Ray Dalio bought his first stock at age 12.
As Conor McGregor said “There’s no talent here, this is hard work. This is an obsession. […] I am not talented, I am obsessed.”
The Unicorns have been obsessed for a LONG time.
“You’re not going to beat the market.
Competing in the markets is more difficult than winning in the Olympics. There are more people who are trying to do it and much bigger rewards if you succeed. Like competing in the Olympics only an infinitesimal percentage succeed, but unlike winning in the Olympics, most people think they can do it.
Before you try to beat the market, recognize that your likelihood of being successful is extremely small and ask yourself if you spent the time to train and prepare to be one of the few who actually wins.” — Ray Dalio
4. They have advantages
Tim Ferriss identified 3 sources of advantages the top investors have when investing (if you don’t have one or more of these advantages, don’t pick a stock):
- Informational advantage: You have information that others don’t.
- Analytical advantage: You can interpret data in a way others can’t.
- Behavioral advantage: You don’t let your emotions control your decisions (hence why I say your psychology is your worst enemy when investing).
“Suddenly, my enormous stock picking hubris was clear. Somehow reading a few books and 10-K annual reports was going to give me an edge? Over not only the professional analysts who lived and breathed this stuff all day every day, but also the executives who run the companies in question? I could succeed where they could not?
Suddenly I realized why even rock star fund managers find it almost impossible to best the simple index over time.” — JL Collins
5. Maybe they’re just lucky (?)
I might get some trouble for saying this. But it can’t be ruled out.
There is a school of thought that believes the world’s top investors are just really really really lucky.
Like I said, can’t rule it out.
The best argument for this (in my opinion) came from Nassim Taleb’s book “Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets.”
Warning: This is a long comment. But it’s well worth reading, understanding, and pondering.
“Construct a population of 10,000 fictional investment managers […]. Assume that they each have a perfectly fair game; each one has a 50% probability of making $10,000 at the end of the year, and a 50% probability of losing $10,000. Let us introduce an additional restriction; once a manager has a single bad year, he is thrown out of the sample. […]
Toss a coin; heads and the manager will make $10,000 over the year, tails and he will lose $10,000. We run it for the first year. At the end of the year, we expect 5,000 managers to be up $10,000 each, and 5,000 to be down $10,000. Now we run the game a second year. Again, we can expect 2,500 managers to be up two years in a row; another year, 1,250; a fourth one, 625; a fifth, 313.
We have now, simply in a fair game, 313 managers who made money for five years in a row. Out of pure luck.
Meanwhile if we throw one of these successful traders into the real world we would get very interesting and helpful comments on his remarkable style, his incisive mind, and the influences that helped him achieve such success. Some analysts may attribute his achievement to precise elements among his childhood experiences. His biographer will dwell on the wonderful role models provided by his parents; we would be supplied with black-and-white pictures in the middle of the book of a great mind in the making.” — Nassim Nicholas Taleb
5 Things You CAN Do
However, there are 5 very useful lessons you can apply to your investing strategy (which allows you to beat 99.9% of people trying to beat the market).
In fact, a lot of “the pros” would give you the same advice.
We’ve talked about each before, so I’ll simply link to those letters.
Here they are:
And that’s it for today!
Today, you learned:
- Why you shouldn’t try to invest like a pro
- What is a “pro” (and who are they)
- What you CAN do instead
See you next week (follow the series here to be notified).
Be well.
R
P.S.: I apologize if my writing seems sloppier than usual. I got LASIK surgery a few days ago (best decision ever). The problem is lights are much brighter than usual (this effect lasts about a month). So, staring at this radiant screen while writing is much harder than I thought it’d be.
Since I write about finance, legal jargon is obligatory (because the guys in suits made me). Before following any of my advice, read this disclaimer.
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