How To Be As Successful As Warren Buffett

The Motley FoolHow would you like to be as successful as Warren Buffett? According to research from the National Bureau of Economic Research, it can be done.

After forensically examining his Berkshire Hathaway portfolio, the Bureau has come to the conclusion that Buffett is not just a great investor but the greatest investor over the last 30 years. But we knew that anyway.

In a nutshell, Warren Buffett’s Berkshire Hathaway has significant alpha. That is just a fancy-pants way of saying that he has outperformed a portfolio comprised of similar stocks.

The researchers also found that Buffett’s portfolio exhibited a significantly higher Sharpe ratio. That’s another fancy-pants term. It tells us that Buffett has not taken on excessive risk to achieve his extraordinary returns. His Sharpe ratio is almost double that of the overall stock market and better than the average for mutual funds overs the last 30 years.

However, that doesn’t mean Buffett’s portfolio is not volatile. His portfolio was found to be over 50% more volatile than the overall market. Interestingly, Buffett also uses leverage to boost his returns. In other words he borrows money cheaply to bet against volatility.

So how has Buffett done what he has done? How has he managed to deliver an annual return of 19.7% between 1965 and 2012?

It’s really quite straight forward.

Buffett looks for:

  • Businesses with high margins
  • Companies with stable and predictable earnings
  • Efficient operations with high asset turnover
  • Companies with a strong balance sheet and
  • Stocks that are cheap compared to their book value

And after he has identified and invested in his chosen companies he is happy to stomach the inescapable rise and fall of the market. That’s because he knows that his high-quality companies should continue to deliver even in down markets.

For most of us, the idea of borrowing to invest is a non-starter. But even in Buffett’s case, leverage, whilst helpful, is not the driving force behind his returns.

Instead, it is his ability to take stomach-churning market volatility in his stride. While many of us might throw in the towel at the first sign of volatility, Buffett says: “Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it.

Volatility is part and parcel of investing. Our very own Straits Times Index  (SGX: ^STI) can be as volatile as any other index in the world. But if you can learn to overcome your fear of volatility, and be “greedy when the market is fearful” then you should be on the right path to becoming almost as successful as the Sage of Omaha.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore Director David Kuo doesn’t own shares in any companies mentioned.