Who in their right mind wouldn’t want to be as great an investor – and as mind-blowingly rich – as Warren Buffett?
I mean, he’s the “Oracle of Omaha.” And he’s worth more than $100 billion dollars.
If it’s hard to wrap your head around that kind of money, think about it this way…
He could give all 332 million Americans – every man, woman, and child – a hundred bucks, and still have $68 billion left over. That’s twice as much as he would have given out. [Note: This is corrected from an earlier version.]
Money doesn’t buy happiness, but as comedian Spike Milligan said, “it can buy you a pleasant form of misery.”
It also buys you choices, and it buys you freedom to pursue what’s meaningful to you – your dream home or vacation, your kids’ or grandkids’ college education, that cool car, helping those less fortunate, and many other possibilities.
That’s why we invest to begin with, right?
Well, I have good news and bad news for you.
Let’s start with the bad: You aren’t going to be the next Warren Buffett. I’m not sure that’s really news, but he accumulated his wealth in a way that isn’t possible for the rest of us.
And now the good news: We can take a different approach but still leverage his concepts. We may never be worth $100 billion, but we can systematically build our wealth over time.
The Key to Buffett’s Success
I’ve been thinking about Warren Buffett and how he made his money because he recently released his annual letter to shareholders.
These are must-reads for many investors, almost like a free master class. (If you’re interested, you can find them here.)
When Buffett invests in a company, whether purchasing shares or just buying the whole company, his preferred holding period is… “forever.”
For 99.9% of the rest of us on planet Earth, buying and holding forever is impractical. And that brings us to what I would say is the real genius of Buffett.
I’ve read his shareholder letters, and I’ve also read his biography, The Snowball: Warren Buffett and the Business of Life. My takeaway is that anyone who wants to be the next Warren Buffett must first buy an insurance company.
I’m kidding, of course, but it’s important to understand how critical this was to Buffett’s whole career.
His success can be traced back to his purchase of National Indemnity insurance company in 1967. In this year’s shareholder letter, Buffett himself acknowledged its impact on his holding company, Berkshire Hathaway:
In 1965, Berkshire was a one-trick pony, the owner of a venerable – but doomed – New England textile operation. With that business on a death march, Berkshire needed an immediate fresh start. Looking back, I was slow to recognize the severity of its problems.
Thus began our journey to 2023, a bumpy road involving a combination of continuous savings by our owners (that is, by their retaining earnings), the power of compounding, our avoidance of major mistakes and – most important of all – the American Tailwind. America would have done fine without Berkshire. The reverse is not true.
Buffett and Berkshire acquired more insurance companies in the ensuing years, most famously Geico in 1996.
So how could a boring old insurance company be the key to Buffett’s success?
Policyholders pay premiums, and the insurance company sets a portion of those payments aside to cover claims. The rest is fair game, including investing it. This ongoing cash stream allows someone to be fully invested… but never really be fully invested. You always have more money coming in to invest.
And that’s the genius behind Buffett’s success. He can keep investing, even as he keeps holding.
Do you always have more money coming in to invest?
If you’re like 99.9% of people planet Earth, the answer is no. Once we’re fully invested, we need to either make more money, wait while we save to invest later, or hold “forever” and hope those stocks we own grow like crazy.
Here’s What We Can Do
Since going out and acquiring an insurance company isn’t exactly practical, we need to find a way to be invested while also bringing in more money to continue investing.
And we can do that by using the profits from our investments themselves.
Rather than buy and hold forever – which Buffett himself doesn’t always do, by the way – we can invest in high-probability trades, take our profits, and reinvest the proceeds. As our investments grow, our profits grow. And so does the cash we have to reinvest.
You can grow your wealth and put the superpower of compounding to work for you by stacking win upon win upon win.
That’s the foundation of my Quantum Edge investing system.
We use massive computing power to retrieve data on more than 6,000 stocks each day. We use algorithms I designed to analyze the most predictive pieces of that data to assign a Quantum Score to each stock. And we use additional algorithms I designed based on my unique experience to track Big Money buying.
Stocks with a high Quantum Score and Big Money buying end up making money for us about 70% of the time, which is exactly what we need to stack our wins and keep rolling more money into new investments.
Profits are not insurance premiums, but they are still investable cash.
To be honest, I think the buy-and-hold-forever approach that our parents relied on might be gone forever. For many reasons, but I’ll highlight three:
- There is more data than ever before, but less certainty about which numbers to trust.
- There’s more volatility than ever, making it hard to zero in on the right trades at the right time.
- And in this age of technology, investing has become an “arms race” built on software and AI-based know-how. Wall Street supercomputers are already out there “rigging” the game in their favor, and investors today need to match that firepower.
I will forever respect and admire Warren Buffett as the legendary investor and likable man that he is. There may never be another Buffett, but today’s investors can leverage the principles of compounding and reinvesting that made him successful. The difference is we must do it by stacking wins rather than holding forever.
Computing power and quantitative analytics help us do just that by tipping the odds heavily in our favor. Arming yourself with this powerful investment technology has never been more important.