Yes that’s right, I said it and I am not taking it back! I believe Warren Buffett the world’s greatest investor is responsible for many investors underperforming the market.
Now before you rush to the bottom of the page to leave an unpublishable comment please hear me out.
First let me say Warren Buffett is an absolute investing legend and I am not here to argue that any of his analysis is wrong. On the contrary, his ability to value companies and articulate as such has resulted in a generation of Warren Buffett clones. So this raises the question why are we not seeing millions of investors outperform the market in the very same way Warren has?
My argument is that Warren’s analysis was perfect for his time when companies would survive a generation but with the advent of the internet and ease of disruption, such analysis while still useful has lost its degree of relevance to today’s investors.
I’ll pause a minute as Buffett disciples pick themselves up off the floor.
If you don’t believe me ask yourself why Warren failed to invest in two of the largest companies on the planet Amazon (NASDAQ:AMZN) and Google (NASDAQ:GOOGL) ?
(As luck would have it, as I was writing this article Warren Buffett actually addressed this very question here )
While you think about that, let me repeat I am not saying Warren Buffett was wrong. What I’m trying to impart is that many investors have become fixated on particular tools that Warren used, such as the well known Price to Earnings Ratio at the expense of other important considerations.
I’ve lost count of the number of investors who have told me they were buying a company simply because of a low PE without any thought given to the fact that such ratios only measure past performance.
Future is the key
Research on Dow Jones companies by Bain & Co. indicates that two out of three large companies (worth $5 billion or more) will go bankrupt, be acquired or break into pieces in the next 15 years.
With such sobering statistics I believe it is important investors approach investment from a different perspective.
Rather than looking at a company because it appears cheap, I suggest starting your research in a sector which has fallen out of favour from the market. From there understand where each company fits, (leader, new entrant, or on the way out) then ask which company has the highest profit margin and which company is growing market share.
Once you determine the pick of the litter Warren’s fundamental approach can be used as a guide for valuation and a suitable entry point.
Do you have an opinion on Warren Buffett and whether he has helped or hindered your performance?
I would love to hear it!
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Disclosure:
Please Note: None of the above should be considered investment advice. These are my own opinions based on a number of years market experience. Please do your own research and consult a qualified financial advisor if you wish to invest.