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Seriously, Warren Buffett Is a Better Investor Than You

But you can learn a lot from him.
/ Source: Motley Fool

At 78 years old, Warren Buffett is no spring chicken. The fact is, most people his age are looking to get money out of the market, rather than put money in it.

Yet Buffett is continuing his life's work -- undeterred by age -- in the same way he always has.

See, in helping privately held Mars buy Wrigley last year, Buffett made a deal with zero liquidity in sight. That's precisely the opposite of virtually all investors in private companies (particularly venture capitalists), who demand a clear path to liquidity from the start.

But not Buffett
The Oracle of Omaha has long preached that the long term is the only view for an investment -- even if the investor is beyond retirement age. He's said before that his ideal holding period is "forever" -- and the Mars-Wrigley-Berkshire deal is yet another example of Buffett putting that theory into practice.

Yet most investors have not learned this lesson. Recent New York Stock Exchange data showed that the average holding period for a stock is now less than one year.

What truly matters
Buffett's willingness to act when others won't, along with his patience and discipline, make him a better investor than you. Those aren't his only advantages, though. Not long ago, we wrote an article highlighting a few other reasons why Warren Buffett is a better investor than you.

It seemed like a truism to us -- the man has built one of history's great fortunes on the power of his investing acumen, after all -- but some readers took offense.

We got emails telling us that Buffett has tons of advantages over the common man, ranging from his enormous war chest of cash to his access to executives and/or privileged information. And while there aren't many people who could command the same sort of sweetheart deals on Goldman Sachs and General Electric, having lots of cash isn't necessarily the advantage many readers made it out to be.

For starters ...
Buffett's enormous cash position is actually an enormous disadvantage when it comes to earning superior stock market returns. It essentially prevents him from investing in anything other than liquid large caps.

Just glance at Berkshire Hathaway's 13-F filing with the SEC, and although you'd recently find tiny liquidation play Comdisco Holding, you'll predominantly find multibillion-dollar companies such as GlaxoSmithKline (NYSE: GSK), Johnson & Johnson (NYSE: JNJ), Nike (NYSE: NKE), and Wal-Mart (NYSE: WMT).

While those are solid companies, their size illustrates how small a pond Buffett generally fishes in (Comdisco is a shocking exception). According to Capital IQ (a division of Standard & Poor's), while there are more than 33,000 companies trading on the world's exchanges, there are just 1,826 currently capitalized at $3 billion or greater. That means Buffett's cash position effectively locks him out of 95% of all public companies.

Furthermore, because Buffett has said he won't invest in technology stocks, he's out another 165 opportunities, including companies he reveres, such as Microsoft (Nasdaq: MSFT).

This hurts
In all, Buffett is restricted to a universe of some 1,661 stocks -- which is far from ideal. In fact, he has said that he could earn 50% annual returns each and every year if he had only $1 million to invest, because it would give him free rein in the market.

With just $1 million or less, for example, he could take advantage of cheap opportunities in the micro-cap sector ... such as $73 million TGC Industries (NYSE: TGE).

But because TGC is so small, Buffett probably doesn't even know about it. Heck, because TGC is so small, you probably didn't know about it, either.

Friends in high places
As for an informational advantage, yes, Buffett has connections. But when he bought a big stake in PetroChina, he admitted that the only research he'd done was to read its annual reports. In other words, he acted on the exact same information available to all of us, and PetroChina tripled during the time Berkshire owned it.

This brings us full circle. It isn't anything artificial that makes Buffett a better investor than you; it's his patience, discipline, and willingness to act when others won't -- even at a healthy 78 years of age.

Buffett may be better ... but don't be discouraged
Buffett's abilities did not develop overnight. It has been a lifelong process -- one that began at age 11.

So while he may be a better investor than us today, we can at least learn from his experiences and -- like he did -- become superior investors over time. That means:

1. Buying for life (or, at least, the long term).2. Buying small (perhaps our lone advantage).3. Buying based on thorough research and due diligence.

Put it all together, and Buffett exemplifies what we try to achieve with our members at Motley Fool Hidden Gems: the pursuit of mastery in investing in the small-cap space. We study companies as small as TGC every day, and recommend only the best opportunities to our subscribers.

If you'd like to learn what companies we're recommending for new money, click here to join Hidden Gems free for 30 days.

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This article was first published May 23, 2008. It has been updated.

Tim Hansonowns shares of Berkshire Hathaway.Brian Richardsowns shares of Microsoft. Berkshire Hathaway, Wal-Mart, and Microsoft are Motley Fool Inside Value picks. Berkshire Hathaway is also a Stock Advisor recommendation. Johnson & Johnson is an Income Investor selection. The Motley Fool owns shares of Berkshire and always discloses its disclosures in thedisclosure policy.