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March 22, 2005

Warren Buffett on Stock Picking and Market Timing

When I talk about all of the data which says it is impossible for anyone to accurately time the market or consistently pick stocks that will beat the market over long periods of time, one of the first defenses offered up is often Warren Buffett.

 

And yet, Warren Buffett himself has always said the same thing. In fact, one of my signature stories in my educational programs about stock picking being a matter of luck, not skill, comes from Warren Buffett himself.

 

Buffett has once again made his views clear on this point in the Berkshire Hathaway 2004 Annual Report to Shareholders:

 

Over the 35 years, American business has delivered terrific results. It should therefore have been easy for investors to earn juicy returns: All they had to do was piggyback Corporate America in a diversified, low-expense way. An index fund that they never touched would have done the job.

 

Instead many investors have had experiences ranging from mediocre to disastrous. There have been three primary causes: first, high costs, usually because investors traded excessively or spent far too much on investment management; second, portfolio decisions based on tips and fads rather than on thoughtful, quantified evaluation of businesses; and third, a start-and-stop approach to the market marked by untimely entries (after an advance has been long underway and exits (after periods of stagnation or decline). Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy only when others are fearful.

 

This from what many hold up as one of the greatest stock pickers of all time! Warren Buffett is not a great stock picker. He is a great businessman. There is a difference. And he knows that and says it constantly.

 

Berkshire Hathaway buys companies, often that are in trouble or have locked up shareholder value. He sits on their boards. He operates them. He releases that value from the inside. You cannot do that.

 

So to say, "Warren Buffett has done it!" is irrelevant. Warren Buffett hasn't done it. He will tell you he hasn't done it, not like you are trying to. Neither can you.

 

What do you think? Do you believe someone can pick stocks that will outperform the market consistently over long periods of time? And if you don't, then why do you still own individual stocks and actively managed mutual funds? Post your comments below.

 

My thanks to Bert Rabbe for sending me the link. If anyone else finds good material they think might be of interest to others, pass it on. If I agree, I'll blog it.

 

Kim Snider, Kim Snider Financial Communications, Chronim Investments and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.

Posted by Kim Snider on March 22, 2005 | Permalink

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