You should consider your time horizon with every investment move you make.
• Capital trap. Your source of investment capital is your salary. Once you retire, you won't have this capital. If you take a pay cut or lose your job before retiring, the effect is the same: You'll have less — or no — investment capital. Meanwhile, Berkshire's investment capital is virtually infinite.
• Activist trap. Often it is Buffett's reputation that assures success. He has become an activist investor, and in times of crisis he exerts the power of his brand as a measure of value. Stocks sometimes rise immediately merely because he buys them. Buffett can go to public companies and negotiate the purchase of shares at prices unavailable to us mortals.
His investment in Goldman Sachs during the financial crisis is a good example. Media articles lauded this successful move as savvy but overlooked the fact that Buffett had purchased various other bank stocks before they cratered during the crisis. He suffered a big loss, and so did Buffetteers who made the same move. They are still licking their wounds, but Buffett's advantages meant that he wasn't even scratched.
Buffett is widely regarded as the greatest value investor of our time. Value investing is the practice of buying stocks that are currently out of favor with the market with an expectation that they will rise in value.
Aswath Damodaran, a finance professor at New York University, discusses Buffett's stellar record as a value investor in his paper "Value Investing: Investing for Grown Ups?"
Damodaran explains that Buffett's renown for this particular kind of investing comes from his successes in the '60s and '70s, when few investors had access to information and the market wasn't dominated by institutional trading, as it is today. Damodaran believes that Buffett would have a hard time replicating this success in today's market.
Buffett's advantage of having epic periods to recover from steep losses contributes to his long view of the markets. Damodaran believes this long view is a key reason for Buffett's continued success.
"While [Buffett] has had his bad years, he has always bounced back in subsequent years," writes Damodaran, a prolific author on investment analysis and philosophy.
One aspect of Buffett's investing philosophy that is highly instructive for individual investors is his rigid discipline — what Damodaran describes as his "unwillingness to change investment philosophies" during tough market periods. Instead, Buffett stays true to his process.
Today, Buffett's process involves his ability to be an activist investor. Anyone can be a value investor, but few can be an activist investor.
Though your process should be quite different than Buffett's, your portfolio will do better if you develop one that suits your goals and risk tolerance and faithfully stick to it. By developing Buffettesque discipline, you can ignore Buffett's moves and instead focus on what's right for you.
Craig J. Coletta firstname.lastname@example.org has 20 years of experience in the financial industry. He is president of C.J. Coletta & Co., a Registered Investment Advisor firm, and president of Coletta Investment Research Inc. Coletta is a Chartered Financial Analyst charterholder, a Chartered Market Technician and a Certified Hedge Fund Professional. He holds a B.S. in accounting and business administration from Rider University, and is a member of the American Institute of Certified Public Accountants.