I have something to tell you. You are not Warren Buffett (Trades, Portfolio). No matter how carefully you follow his trades, how often you read his advice or how much of a Buffett scholar you think you are, you are not the "Oracle of Omaha." You are not even close.
This is a bit of a generalization. What I am trying to say is that no matter how much research you do into a particular investor or investing style, you are not an expert on the topic. And you certainly should not invest unless you understand this caveat.
Experience is key
The world’s most famous investors have decades of experience behind them. This experience compounds over time to form a unique knowledge base. Additionally, this knowledge base is complemented by investors’ investments.
Take Buffett’s position in IBM (IBM, Financial) as an example. When the billionaire first established the position, many Buffett watchers were surprised. In the years following, as IBM shares languished, Buffett drew plenty of criticism from other investors (not that he cared) and headlines like "Has Buffett Lost His Touch?" appeared regularly in the financial press.
Buffett has an unrivaled view of IBM however. His ownership of BNSF, Coca-Cola (KO, Financial), Wells Fargo (WFC, Financial) and American Express (AXP, Financial) gives him one-of-a-kind access to these companies, and he can see how the businesses integrate IBM’s offering into their platforms. It is likely Buffett built his IBM holding off the back of research from these businesses, which shows how critical IBM’s offering is to multinational businesses.
Billionaire synergies
It is not just Buffett that is able to take advantage of such "billionaire synergies." Carl Icahn (Trades, Portfolio), Ray Dalio (Trades, Portfolio), George Soros (Trades, Portfolio), Charlie Munger (Trades, Portfolio), Seth Klarman (Trades, Portfolio) and David Tepper (Trades, Portfolio) all have a network of contacts, research analysts and a latticework of experience the average investor will never be able to take advantage of.
One of Peter Lynch’s most famous sayings is "buy what you know," which is a fairly misleading statement. The average investor does not know much outside the industry they work in, and it is never wise to buy shares in your employer. That said, this statement is not entirely misleading.
If you know you are not special and have no advantage over other investors and the wider market, then you know it is not sensible to try and outperform. Therefore, if you know this and buy equities based on knowing you are not special, the average investor is confined to index funds and ETFs.
Terrible performance
This may not be such a bad thing. There is loads of research showing the average investor grossly underperforms the market year after year.
According to research conducted by Dalbar Inc., for the 20 years ending Dec. 31, 2015, the S&P 500 Index averaged 9.85% a year. A pretty attractive historical return. The average equity fund investor earned a market return of only 5.19%. Furthermore, two years ago, Richard Bernstein of Richard Bernstein Advisors published a chart showing the average investor achieved an annualized return of just over 2% between 1993 and 2013, making the investor the fourth worst-performing asset class. Even hedge funds, for all their criticism, achieved an average annual return of nearly 9% over this period. Gold gained 6%.
The bottom line
So overall, to be a successful investor, you need to understand your own pitfalls. One of the average investor’s main pitfalls is the inability to beat the market. It takes years of experience and focus to be able to build an encyclopedic knowledge of the market similar to that of Buffett or any other billionaire. Without this knowledge, investing can be a costly experience. To be a successful investor, you must know your key weakness and not blindly follow others into positions without first realizing the opportunity offered and the risk-reward potential.
Disclosure: The author owns no shares mentioned.
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