Invest Like Buffett

Warren Buffett is renowned for his long-term, strategic approach to investing, which has driven decades of strong compounded returns for him and his investors. One of his more memorable quips was that his favorite holding period is “forever.” While most investors have similarly long-time horizons, often measured in decades, they generally invest exclusively in assets that are the domain of traders and speculators.  

The bulk of Buffett’s wealth has been generated from privately owned assets. This is also true of many of the country’s wealthiest families. Look around you, other than a relatively few (albeit big) public companies, most of the businesses in your city or community are owned by small groups of investors.  More than 80% of companies with greater than 500 employees are privately owned.  Unencumbered by short-term results, these companies can make decisions that are beneficial over the long-term, without regard to any near-term shortfalls this may cause. We believe that this long-term approach practiced by the management of private companies explains why these firms are generally leaders when it comes to innovation. Unfortunately, many managers of public companies do not share Buffett’s long-term perspective. Stock price is a key driver of manager compensation, and quarterly earnings results tend to drive near-term stock performance. This incentive makes it difficult for leaders to invest in innovations that may not pay off for years to come.  Indeed, private companies generate higher-quality patents and typically experience a slowdown in the pace of patent development once the firm enters the public markets. 

Private markets are often assumed to carry more risk than traditional public markets. While it likely introduces different types of risk to an investor’s portfolio, it does not necessarily increase the portfolio’s overall risk level. When investors allocate to private real assets (like property and infrastructure), they can do so without taking on the volatility inherent in publicly traded stocks. Similarly, private lenders negotiate deals tailored to support the debtor’s business while protecting the creditor.   

While holding private assets generally requires giving up access to immediate liquidity, many investors overestimate the value of accessibility. An investor should rarely need to liquidate all of their portfolio in a single year. Assuming a simple 5% withdrawal rate implies that a retiree may only need 35% of their assets within the next seven years! While most investors should maintain more liquidity than their budget might suggest, it puts into perspective the relative insignificance of limiting liquidity within 10-35% of your portfolio.  

How can an investor incorporate private strategies in their portfolio? Read here for our description of the unique risk and return characteristics of private investing, how to access them, and how to incorporate them into your portfolio.  

Click to read Making Long-Term Investments in a Short-Term World

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