Most People Learn the Wrong Lessons from Warren Buffett
By: Ben Le Fort
Tags: Life Lessons, Money, Personal Finance, Investing, Personal Development

Most People Learn the Wrong Lessons from Warren Buffett

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Warren Buffett is one of the most famous investors of all time. His fame is due not only to his legendary performance as an investor but also to his advice, which has resonated with millions of people.

For decades people have made the pilgrimage to Omaha to hear Buffett speak at the annual Berkshire Hathaway shareholder meeting. I know of people who have invested in Buffett’s company just for the privilege to attend the annual shareholder meeting, and here Buffett speak.

We can learn a lot from the wisdom of Warren Buffett. However, most people seem to have learned the wrong lessons from Warren Buffett.

In this article, I review the wrong and right lessons we can learn from the Oracle of Omaha. I also discuss why it’s important not to try and imitate the specific actions of successful people and instead adopt the general principles that can be easily applied to your life.

The wrong lesson to learn from Warren Buffett

Here is one of the many famous quotes from Warren Buffett on picking stocks.

“All there is to investing is picking good stocks at good times and staying with them as long as they remain good companies.”

On its face, that sounds like pretty good advice. How could you argue with the premise of only investing in good companies?

While that may work for Warren Buffett, it will almost certainly not work for you. It’s no different than if Micheal Jordan were to say, “all there is to basketball is getting to your spot on the floor and hitting fadeaway jump shots.”

Again, that sounds reasonable, but go and try to hit a jump shot over a six-foot-eight guy in an NBA game. You may hit a shot, but if you do, it would most likely because of luck rather than skill.

Picking stocks is no different, you might hit a few shots, but it will probably be due to luck rather than skill.

Most of us would accept the fact that hitting a jump shot over an NBA player would be luck. When your shot gets blocked, and you fall flat on your face, it will become pretty clear you are outmatched.

But when it comes to investing, we don’t have the physical reminders of how out of our depth we are. So, it’s easier to convince ourselves that we can pick stocks like Warren Buffett.

The most likely outcome of picking stocks

If you're not convinced that picking stocks is a bad idea, you should read this 2018 paper by Hendrik Bessembinder from Arizona State University entitled “Do Stocks Outperform Treasury Bills?”.

Here is a summary of the paper.

Bessembinder studied the lifetime performance of individual stocks in the U.S, dating back to 1926.

60% of all stocks he studied had a lifetime return less than a 30-day U.S Treasury Bill (T-Bills).

That means that you would have had better returns if you had invested in T-Bills (which are risk-free) than if you had invested in the majority of U.S stocks since 1926.

4% of U.S stocks accounted for 100% of the gains in the U.S stock market since 1926.

Bessembinder concluded that “The results help to explain why poorly-diversified active strategies most often underperform market averages.”

Translation: Picking stocks is a poor investing strategy.

By picking individual stocks, you have a higher probability of underperforming a risk-free asset than you do of beating the market.

Trying to pick stocks like Warren Buffett is like trying to play basketball like Micheal Jordan; it isn’t going to happen.

Even Warren Buffett would agree that you should not try to be Warren Buffett

In Vanguard founder Jack Bogle’s book, “The Little Book Of Common Sense Investing,” Buffett is quoted as saying the following.

A low-cost index fund is the most sensible equity investment for the great majority of investors…By periodically investing in an index fund, the know-nothing investor can actually out-perform most investment professionals.

For those unfamiliar, an index fund simply an investment that tracks the entire stock market. It is the opposite of what Warren Buffett does for a living, but it’s also what he believes most of us should be doing.

The right lesson to learn from Warren Buffett

If you want to try and emulate Warren Buffett’s success in investing or any famous person’s success, you need to adopt the broad strokes of what made them successful rather than trying to do it the exact same way they did it.

In Buffett’s case, the lesson we can learn from him and actually apply to our own lives is that the key to building wealth is staying invested for decades and allowing compound interest to do its work.

Here’s Buffett saying exactly that in his own words.

My wealth has come from a combination of living in America, some lucky genes, and compound interest.

The legend goes that Warren Buffett bought his first stock at 11-years old in 1941. That means has been investing in the stock market for nearly 80-years.

If you had invested $100 per month in the S&P 500, reinvesting any dividends you received starting in 1941(the year Buffet started investing), you would have $59,379,858 today.

Not exactly a billionaire, but more money than you would ever need.

Most of us won’t have an 80-year time horizon, but the point is that even a small amount of money can add up to huge sums over a lifetime.

But, compound interest only works if the process is allowed to proceed uninterrupted. The key is not to sell when things get dicey.

If you want to learn how to invest like Warren Buffett, don’t try and pick stocks. Instead, focus on managing your emotions through the inevitable market crashes and recessions along the way.

If you consistently invest every month into low-cost index funds and allow compound interest to do its work over the decades, you too can be a great (and wealthy) investor.