No one can dispute that Warren Buffett is a good investor—he’s made a ton of money over many years and it’s been well-documented. He holds court periodically and even his public calls have been pretty good, like his “Buy American. I Am.” editorial in the New York Times on October 16, 2008. (More recently he said bonds should come with a warning label, so take that for what it’s worth.) You could do worse than trying to emulate Warren Buffett.
So what is St. Warren actually doing? Well, fortunately some college professors did the heavy lifting. They analyzed Berkshire Hathaway’s quarterly filings from 2006 all the way back to 1980, 2,140 quarter-stock observations. CXO Advisory had a nice summary of their work. In the words of the professors:
…we observe a median holding period of a year, with approximately 20% of stocks held for more than two years. At the other end of the spectrum, approximately 30% of stocks are sold within six months.
Yep, Warren Buffett has 100% turnover. He blew out 30% of his portfolio selections within six months, and held about 20% of his picks for the longer run. That is active trading by any definition.
A mythology has grown up around Mr. Buffett, that he has a somewhat magical ability to select stocks and then holds on to them forever. The truth is far more pedestrian, and encouraging since it is something any investor can do. He might be holding on to what is working, but his portfolio holdings are pared relentlessly. If I had to guess, I suspect Warren Buffett is simply doing what every good investor does. He’s using his best judgment to select stocks and then cutting the losers and letting the winners run. (The casting-out process used in our Systematic Relative Strength portfolios does exactly the same thing.)
There’s no glory—or capital gain to be had—in holding an underperforming piece of garbage for the long run. Mr. Buffett’s stock selection may be above average, but his genius is more likely in his discipline.
Don’t be conned by the myth of buy-and-hold. Even Warren Buffett isn’t doing it. Search everywhere for good investment opportunities, hang on to the winners and get rid of the losers.
Source: Photobucket (click on image to enlarge)