Monday, February 6, 2012

| Hero | Warren Buffet: Slow and Steady Wins the Race

How Warren Buffett Plays the Tortoise and Not the Hare


On 12 January Britain’s largest supermarket chain, Tesco, reported weaker than expected Christmas sales. It threw in a profit downgrade for good measure. As a result, the share price fell 16 per cent. It was Tesco’s largest share price decline in over 20 years.

Amongst the panic, Warren Buffett’s investment vehicle Berkshire Hathaway increased its stake in the food retailer to more than 5 per cent. Buffett first invested in Tesco in 2006. In the five years since, the stock price is down from where Buffett first bought in.

Yet he just purchased more.

This approach is what sets Warren Buffett apart from 99.9 per cent of investors. After investing in a company for 5 years, with the stock price going nowhere, most investors would ‘throw in the towel’ and sell after a profit downgrade and 16 per cent price plunge.

It’s the emotion of it all. We’re fixated on price. If the price is not doing what we want (moving steadily higher) we get restless. Sharp price movements invite an emotional response.

This is Warren Buffett’s strength. He avoids the emotional response because he focuses on the business not the stock price. Business value (and therefore share price value) is hard to grasp. It’s subjective. And you have to believe that in the long run value will always rise to the top. You just don’t know how long the long run really is.

Investing is a marathon. Slow and steady wins the race. Trying to catch every rally and moving from one sector to the next ‘hot’ area of the market is a mug’s game. It makes you feel like you’re doing something but you’re really just chasing your tail.

Over the long term, the market will deliver returns commensurate with the business performance of the companies listed on the exchange. If you invest in companies that offer the prospect of above average long-term returns, you will beat the market – over the long term.

Warren Buffett’s performance over the decades validates this approach. He is the ultimate tortoise. But keep in mind he beats the market, first, by buying companies at a good price. And second – and perhaps more important – by overcoming the emotional constraints to successful investing.

Greg Canavan

Editor, Sound Money. Sound Investments.