Introduction
On May 3rd, the annual Berkshire Hathaway shareholders' meeting was held as scheduled. This event attracts investors and business leaders from around the world. However, on social media, there are always those who look down on Berkshire's shareholders' meeting, believing that Buffett's words are just grand theories that are too far removed from ordinary people. When ordinary people try to imitate Buffett's investment methods, they often find that the results are not particularly ideal, and in some cases, they may even suffer heavy losses. This article will explore why this is the case and discuss how ordinary people can learn from Buffett to achieve good investment returns.
Why It's Hard for Ordinary People to Make Money with Value Investing
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Misunderstanding of Value Investing: Many people think that value investing is simply buying low, holding long-term, and selling high. But true value investing is based on an in-depth understanding of a company's long-term competitive advantages and intrinsic value. This requires a comprehensive analysis of a company's business, revenue, debt, and competitive advantages. Unfortunately, ordinary people often lack this analytical ability and may not even read company financial reports regularly. As a result, they may buy cheap stocks that are actually value traps, with no growth potential, leading to losses.
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Poor Psychological Quality: This is often a consequence of the previous point. Value investors usually buy stocks when they are undervalued or at a relatively reasonable price. Therefore, it is likely that they will need to hold the stocks and wait for the valuation to recover in the future. However, without a deep understanding of the company, it will be very difficult to withstand short-term stock price fluctuations. Buffett once said that if you cannot bear a 50% drop in the stock price without selling, you are not suitable for investing in stocks. Most ordinary people, due to a lack of understanding of the company's business, tend to panic and sell when the market drops. According to a 2023 report by the Fund Association, the proportion of ordinary people cutting losses in a bull market is as high as 73%. At the same time, they are also prone to chasing high when the market rises, which often leads to losses.
Differences between Buffett and Ordinary Investors
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Funding: The key here is not just the amount of funds, but the source of funds. Berkshire Hathaway has a free ammunition depot - the float from its insurance business. Float is the money held temporarily before claims are paid. For example, auto insurance customers pay premiums every year, but claims may occur several years later. Berkshire Hathaway uses the float from its insurance companies to invest in long-term assets such as stocks, bonds, and infrastructure. Because Berkshire Hathaway's insurance business has long-term underwriting profits, the float is equivalent to an interest-free loan. And the float can be held for several years or even decades, which perfectly matches Buffett's long-term holding of high-quality assets strategy. For example, when Buffett acquired BNSF Railway and invested in Apple, he relied on long-term and stable float support. In addition to acquisitions, the low-cost float enables Berkshire Hathaway to achieve long-term compound growth. In contrast, ordinary people usually face higher borrowing costs when using leverage, and are more vulnerable to short-term market fluctuations.
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Long-Term Investment Patience: Buffett's classic investment cases usually have a time span of 10 years or more. He focuses on the long-term value of enterprises and has sufficient resources and confidence to wait for returns. However, most ordinary people often need short-term returns to improve their lives, such as buying a house and repaying loans. This makes it difficult for them to hold stocks as calmly as Buffett.
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Market Influence: Buffett's every buy and sell decision is closely watched by the market and can even cause stock price fluctuations. For example, when he buys a certain stock, other investors may follow suit, driving up the stock price. But ordinary people's transactions have no impact on the market, and they can only passively accept price changes.
How Ordinary People Can Learn from Buffett
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Adopt Buffett's Core Investment Philosophy: Buffett's core philosophy is that buying a stock is buying a part of a company. We should focus on a company's long-term competitive advantages and intrinsic value, and analyze its products, business, and revenue, rather than relying on news to predict short-term stock price fluctuations. For example, when Nvidia's stock price was around $600 - $700, it was hard to believe that its market value could exceed that of Apple and become the world's largest company. But it happened. Similarly, the stock price of Novo Nordisk has fluctuated significantly. We should not try to predict short-term market trends, but focus on the long-term value of the company.
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Leverage Our Own Advantages: Ordinary people also have advantages that Buffett does not have. For example, we can invest in areas we are familiar with. If we work in a certain industry, we have a more direct understanding of its dynamics and leading enterprises than Buffett's research team. In the Internet age, we can easily obtain a large amount of information through the Internet, such as financial reports and real-time news on social media. In addition, small capital also has its advantages. It is easier to enter and exit the market without significantly affecting stock prices. We can focus on some companies that are overlooked by institutional investors.
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Practice Long-Term Investment: Buffett once said that his holding period is forever. Although it is difficult for us to hold stocks forever, we can try to extend the investment period as much as possible. Reducing short-term trading can not only reduce taxes but also reduce the chance of making mistakes. For example, choosing a reliable company and holding it for three to five years is likely to achieve better results than frequent trading. Buffett made 90% of his wealth after the age of 60. Investment is not about short-term cleverness but long-term wisdom.
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Continuous Learning and Practice: Investment is a practical discipline. Buffett became a master through decades of accumulation. We can start by reading, such as Buffett's shareholder letters and various investment learning materials. Then, through practice, we can learn from every transaction.
Conclusion
Although we cannot have the same resources as Buffett, we can learn his investment philosophy, adhere to long-term investment, pay attention to risks, leverage our industry advantages, and continuously learn to expand our ability circle. These methods do not require billions of dollars, but only time and effort. By doing so, we can go further on the road of investment.
Portfolio Update
This week, my return rate was -2.05%. Since March 2022, my total account return rate is 97.51%. In terms of positions, I regularly invested $100 in Microsoft this week, and there were no other operations.
On May 7th, Novo Nordisk released its first-quarter financial report. The competition in the weight-loss drug market is becoming increasingly fierce. Novo Nordisk's first-quarter sales fell short of expectations, and the sales of its flagship weight-loss drug Wegovy also did not meet expectations. The company is facing severe challenges from competitors. At the same time, Novo Nordisk lowered its full-year sales growth forecast at constant exchange rates from 16% - 24% to 13% - 21%, and lowered its operating profit growth forecast from 19% - 27% to 16% - 24%.
Although the financial report shows that Novo Nordisk's weight-loss drug still has a market share of more than 50% globally, the management said that due to the rapid growth of combination GLP-1 drugs in the US market, Novo Nordisk's weight-loss drug market penetration rate is lower than expected. As I previously introduced in my program, although Novo Nordisk's injectable weight-loss drugs were the first to enter the market, their market share is declining in the face of competitors. The long-term prospects of Novo Nordisk depend on its ability to respond to the next-generation weight-loss drugs launched by competitors and the oral weight-loss drug tablets announced by competitors last month.
The short-term rise or fall of the stock price largely depends on market expectations. Novo Nordisk started with insulin and has a high market share in the insulin market. However, from the current experimental results, the effect of Novo Nordisk's latest weight-loss products is indeed not as good as that of competitors' similar products. Benefiting from the rapid growth of Novo Nordisk's revenue in the past two years, although the current PE of Novo Nordisk is only more than ten times, if its market share continues to decline, its PE is likely to increase. And the overall market value of Novo Nordisk is still very high. Therefore, if you want to bottom-fish Novo Nordisk, you must be very cautious.
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