Buffett's Success Can't Be Duplicated

 | May 01, 2013 | 5:30 PM EDT
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Warren Buffett is widely regarded as the greatest investor of all time. His folksy charm, humor and simple explanations have great appeal to individual investors navigating the market waters. No one has served as a better model for investors than Buffett has.

But the great irony of Warren Buffett is that people have a tendency to believe that they can easily replicate what he has done, even though what he does is rare and extremely difficult. If others could repeat his success, the Forbes 400 would be populated by passive investors, but most of the great fortunes there are the product of founding companies like Wal-Mart (WMT), Microsoft (MSFT), Google (GOOG) and Facebook (FB) and Buffet's own Berkshire Hathaway (BRK.A, BRK.B).

The general misconception is that Buffett simply buys great stocks and then holds them for a very long time. The stocks appreciate tremendously and he compounds his capital and makes billions. It sure seems like a simple recipe for great wealth. The truth is that finding the stocks that are likely to have fantastic growth over a very long time is extremely difficult. Buffett himself has said that only a handful of such opportunities occur in a lifetime.

One thing that is often overlooked is how Buffett has benefited from market timing. His investments in stocks such as Coca-Cola (KO) and Procter & Gamble (PG) worked well because he rode the wave of one of the greatest bull markets ever. Many of his holdings have been stagnant for years, and if you had tried to copy his portfolio at the wrong time, you would not have fared well.

I contend that long-term buy-and-hold investing is as -- if not more -- difficult than active trading. The biggest problem that long-term investors encounter is that it may take them years to realize that a stock that they think will be the next Google is really the next Webvan or Pets.com.

Effective long-term investing requires a special sort of insight that isn't easily duplicated. If it were easy or simple, Warren Buffett would be just another investor. He is a legend because he is able to do something that almost no one else can do.

Another aspect of the Buffett legend is that many people don't realize that many of the deals that made Buffett rich aren't available to the average investor. He didn't just make passive investments at market prices, he cut great deals with companies that were often in very weak negotiating positions. His access to huge amounts of capital provided him with an advantage that few people have.

That's not to say Buffett doesn't face challenges. He can be a very aggressive trader at times (in his early days, he turned his capital over quite a bit), but due to the sheer size of his funds now, he has more limited flexibility.

The individual investor can learn a lot from Warren Buffett, but should be skeptical when considering how easy it easy to duplicate his success by simply buying a stock and holding it for a very long time. There is much risk associated with that approach when you don't have the special insight and knowledge Warren Buffett has.

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