In the world of finance and investing, there are a few different types of investors. It is important to know which one you are or aspire to be:
Peter Lynch is considered by some to be the greatest stock picker ever. He managed Fidelity's Magellan Fund for a period of thirteen years attaining a compound annual return rate of 29 percent during that period. He quit to spend well-deserved time with his family and now manages a fund for a charity. He is one type of investor characterized by constant obsessing about companies with a pedal to the metal approach. Lynch was a very active investor buying and selling many company's shares at a high volume. I am not smart enough, or dare I say pro-active enough to succeed with Peter Lynch's approach.
Many would consider Warren Buffett the best ever. He "only" has achieved a 19 percent compounding annual rate of return compared to Lynch's 29 percent, but he has done it for over 50 years... not 13. Get out your calculator out and compound that rate for that long starting with a low number like 10,000 and you will soon realize why Buffett is amongst the richest men in the world and he didn't invent anything. His philosophy is more simple. Find great companies with a wide moat that are likely to be around in 100 years and invest heavily in them. One such company is The Coca-Cola Corporation. Warren bought all the Coke shares he could buy for a period of months once he and his partner, Charlie Munger, figured out that it was vastly undervalued by Mr. Market based on what they determined was absolutely going to happen. Coke's advantages in distribution, superior products and superior branding coupled with population growth the habitual nature of Coke drinkers to drink a lot of it were all valuable insights for Warren and Charlie. They bought it and have never sold a share. Instead they waited, and collected the nice dividend... and the share price went up, giving them additional value...and they have only paid taxes on the dividends. The unrealized returns on the purchase of shares i.e. the exponential growth exceeding many billions of dollars have yet to have a dollar of tax paid on them.
Buffett and Munger's buy and hold (unless conditions change) philosophy fits my ability level much better than Lynch's. I would venture to say that less than 10 percent of all stock investors can achieve a superior return by adding in the fees and taxes associated with active investing. This is the advantage of selectively picking a stock, maybe one or two per year on average, and holding it for a minimum period of five years.
Here's the rub: Since Buffett is the CEO of Berkshire Hathaway, he is required to report his activities to the Securities and Exchange Commission quarterly and annually through 10Q and 13F reports. These are public information. Let that sink in... So, one (i.e. YOU) can pull up Berkshire's 10Q quarterly report online... see what Buffett bought recently... review the stock price for the period he was buying... and, when it's cheaper than or similar to the price that Warren freakin Buffett paid for it, buy it yourself. And since you know what type of investor he is, i.e. the buy and hold type, you can do the same. There are websites that do the work for you. Again, all you have to do is bet on a winner like Buffett, Carl Icahn or George Soros. I prefer Buffett because he is, well, Warren Buffett. That, and he holds for longer periods than most, which makes my job easier. Buy what the greatest investor ever buys, for less than he pays for it, and don't sell. It's like cheating on a test.
So there you go. To use a Back to the Future II reference, I just gave you the sports almanac. For the few of you that have the brains, work ethic, and know-how of Peter Lynch (who are we kidding...none of you do), his way may be more profitable. For the rest of us, copy Buffett. If you lose, he loses too. Happy investing.
-Eric Moneybags
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