Famous for his principles in value investing, mainstream media regard Warren Buffett as one of the most successful investors of all time. Buffett runs Berkshire Hathaway (Symbol: BRKB), one of the favourite stocks for many investors in the world.
But there is an alternative school of thought challenging that Warren Buffett’s principles are “old school, obsolete, unrealistic and unsexy”.
Buffett’s principles and his lifestyle
Keywords of value investing principles are “long-term”, “patience” and “value”. Very much slow and steady. And people tend to forget that Buffett started investing when he was 10 years old, and he has since then been consistent until today. With an average ROI of 22% per year and compounding power, it is easy to see why Buffett ends up being one of the wealthiest people on the planet.
Realistically though, how many people start investing at the age of 10? Probably no one else apart from Buffett himself.
Modern day lifestyle, inflation and debt
Consider an alternative scenario where Buffett only starts investing when he was 30, whereby he would have been drowned with student debts from pursuing a master’s degree or PhD. With a regular job, he is only left with some USD500 a month after deducting the necessities. At the same ROI of 22% per year, he would end up with 99.9% less even after a period of 30 years.
There is just no way Buffett would be labelled as “the most successful investor”, even if he had been disciplined in his investment journey based on this alternative scenario.
The truth is that most people belong to this alternative scenario rather than being born as an investment prodigy who would start at the age of 10.
Add inflation into the picture and the ROI would be eroded to somewhere between 15-18% per year. Growing your wealth with a small capital and at such a speed is just not enough to keep up and live a decently happy life, much less to achieve financial freedom or becoming rich.
Value investing with little money down does not make any sense
Once again, consider yourself as an individual in the alternative scenario mentioned earlier. With just USD 500 spare cash a month and a long-only strategy, it is not easy to salvage a bad entry point, especially if you entered at the highest point of the market. It is also mentally painful if you decide to practice dollar cost averaging (DCA) when the market is crashing, as the more cash you invest, the more your portfolio will be bleeding. Sometimes it takes half a decade for the investment to break even. And the investor would already lose out to inflation too. For nothing.
What a pain.
An average joe with just USD 500 spare cash a month also must diversify. Playing the all-in strategy means you go big or go home. Buffett can do concentrated positions because he has the holding power, but truth is most people do not have such holding power. Choices are needed in certain occasions, and if one asset class is down, people do need another asset class to cover back the losses. And that is just how reality works.
A lot of flexibility is what helps the average individuals
This is where CFD trading becomes very appealing to many. Flexible, small and quick – just like a ninja.
Make money no matter the market is bullish or bearish
In CFDs, you can choose to bet if the market is going upwards or downwards. If the market is crashing, you can simply choose to follow the trend and short the market, making money when everyone else is bleeding.
Fast in fast out equals healthy cashflow
Most CFD traders practice intraday trading, and positions would be closed quickly to avoid overnight risks. Such practice also allows for healthy cashflow for a regular person. There would be no necessity to have your USD 500 cash stuck for extended periods of time.
Lower barrier to entry with leverage
With leverage of up to 500:1, CFDs also offer a lower barrier to entry – you only need to put up a small sum to gain full market exposure.
With a starting amount of USD 500 and leverage of 500:1, you can open positions of up to USD250,000, which can potentially amplify your profits. With Warren Buffett’s methods, you will have to earn the spare cash of USD250,000 first, which is not really viable to many.
Diversification of markets you can expose yourself to
You can gain exposure to forex, commodities, bonds, shares, indices and ETFs via CFD trading. It is easy to hedge or diversify with CFDs.
So, is Warren Buffett lying?
Perhaps from his own perspective, Buffett is not lying per se. But his methods are unrealistic and cumbersome for anyone without USD 1,000,000 in cash lying around waiting to be invested.
Once a while, everyone would want a cup of latte or boba tea, travel to another country, celebrate little moments in life, and just live simple happiness. Life could feel meaningless if every single penny saved must be invested and had to be locked for at least half a decade.
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