Buffett only did one thing right in 60 years, but 99% of retail investors have never done it even once.
In 1962, Warren Buffett bought American Express and held it for nearly 60 years without selling. During this period, American Express encountered the "Salad Oil Scandal," and its stock price plummeted by 50%.
Almost everyone on Wall Street was selling, but Buffett instead increased his position. This investment ultimately grew by over 150 times.
Most people's reaction after hearing this story is: his stock-picking vision is too good.
The "vision" is an illusion. Buffett wrote in his 1996 shareholder letter that they hold good companies for longer than the market expects.
Over 60 years, his core advantage has only been one: He can do what most people cannot—do nothing.
Dalbar releases an annual study on U.S. investor behavior, with data tracking spanning over 30 years.
The 2023 report shows that over the past 20 years, the S&P 500 had an annualized return of 9.8%, while the average equity mutual fund investor achieved only a 6.3% annualized return during the same period.
A difference of 3.5 percentage points. They didn't pick the wrong fund; the entire gap came from the timing of their buying and selling.
The stereotype of retail investor losses is picking the wrong stock. A more accurate description is: They bought right, but held wrong.
Since 1965, Berkshire Hathaway's stock price has fallen by more than 50% on four occasions.
Each time, the market asked: Is this time different? Each time, Buffett's response was to continue holding, and even buy more.
During the 2008 financial crisis, Berkshire's book losses once exceeded $11.5 billion. He published an article in The New York Times titled "Buy American. I Am."
What did retail investors do during the same period? U.S. mutual fund data shows that net redemptions in October 2008 alone exceeded $72 billion, a record at the time.
A large number of people exited near the bottom, then re-entered at high points after the 2009 rebound. One buy, one sell—both steps were in the wrong direction.
When the market falls, people get a feeling: this time it might not come back. This feeling is very real, and every major crash has enough "experts" explaining why this is a historic crisis, further reinforcing this feeling.
Before his passing, Buffett's partner Charlie Munger said in an interview that in their 60 years at Berkshire, they never seriously discussed "should we sell now."
They only discussed one thing: Will this company still be here and still be profitable 10 years from now?
That is the real fork in the road.
Retail investors base their decisions on price. If it goes up, they think they're right; if it goes down, they think they're wrong. Price changes every day. Making decisions based on something that changes daily inevitably leads to a lot of ineffective actions.
Buffett looks at the business itself: Has the company's competitive advantage changed? Has its profitability changed? Has its moat been eroded?
The quality of a business changes only every few years, so he acts only every few years.
There's another number in that Dalbar report: The average holding period for a fund by a typical investor is 3.3 years. For the best-performing funds during the same period, the average holding period of their investors exceeded 10 years.
They didn't pick the wrong fund; they just couldn't hold it.
The most accurate description of retail investor losses is: Making decisions at the wrong frequency on the right assets.
If you want to invest using Buffett's logic, only two questions are worth spending time to answer.
How does this company make money, and will this way of making money disappear within 10 years? If the answer is no, then what you should do when the stock price falls 30% is exactly the same as when it rises 30%: do nothing.
Is the money you used to buy this stock absolutely not needed within the next 5 years? If not, you simply don't have the conditions to hold it. Once you need the money for life expenses, you'll be forced to sell at the worst possible time and become a data point in the Dalbar report that drags down the average return.
Buffett is not a stock-picking genius. He just took "inaction" to a level others cannot achieve.
The copyright of this article belongs to the original author/organization.
The views expressed herein are solely those of the author and do not reflect the stance of the platform. The content is intended for investment reference purposes only and shall not be considered as investment advice. Please contact us if you have any questions or suggestions regarding the content services provided by the platform.
