Warren Buffett and the value of patience
16 October 2017 | Topical insights
Warren Buffett's track record provides important lessons for value- and other factor-based investors.
The year 1999 wasn't great for Mr Buffett. Share prices were heading skyward as "irrational exuberance" spread through the market, and demand for technology stocks soared. The tech-heavy Nasdaq share index – which included Amazon, Microsoft and AOL – rallied 85.6% in calendar year 1999 and helped lift the S&P 500 Index up 19.5%.1 Happy days for both Wall Street and Silicon Valley!
Meanwhile in Omaha, Nebraska – home of Buffett's Berkshire Hathaway – things were not quite as rosy. In 1999, Berkshire reported its worst performance under Buffett's stewardship, underperforming the S&P 500 by a substantial margin.2
Pundits at the time proclaimed a new era of investing. And despite Buffett's stellar reputation, some were calling him a dinosaur. Well, we know how that all turned out. In the years since 1999, shares in Berkshire Hathaway have provided very strong long-term performance.
But what does this have to do with factor-based investing? A couple of things.
First, some definitions. Factor investing attempts to replicate the performance of a particular investment style – for example, value investing, which involves searching the markets for opportunities other investors may have missed. But to realise the potential long-term benefits, factor or value-focused investors need to be willing and able to withstand periods of underperformance. Just like Warren Buffett in 1999.
Mr Buffett is a living symbol of value investing. One of the key tenets of his approach is a focus on company shares that can be bought cheap relative to the underlying fundamentals of their businesses. Investors looking to mimic this style through factor-based investing typically invest in companies where evidence points to great potential for future growth whilst their shares are trading at something of a discount.
Finally, the experience of Berkshire Hathaway during the tech bubble illustrates one of the most important virtues when it comes to factor-based investing: Patience.
Thick and thin
We are all familiar with Warren Buffett's impressive track record. He has outperformed the market pretty consistently for over half a century.
But it hasn't all been smooth sailing. Over the years, Buffett's investment style has drifted in and out of favour with the broader market. Sometimes value stocks have been the market darlings, other times the market dogs.
It's not just talent that has helped Mr Buffett achieve success, but patience as well.
And it's the same for investors adopting factor-based investing – or any type of active investing, for that matter. Strong long-term performance requires patience and an ability to tolerate periods of poor performance.
Patience by itself isn't a guarantee for investment success. But a lack of patience can undermine even the best investment strategy.
1 Source: FactSet.
2 Source: Bloomberg.
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