Difference between Warren Buffett and Peter Lynch
One of our readers was asking the other day if I could profile the difference in investment approach between Warren Buffett and Peter Lynch. So here are some of the things I’ve managed to come up with:
Portfolio Size
1. Warren Buffett is a “Focused Investor” investing only in companies which he considers outstanding. His portfolio consists of much fewer stocks compared to fund managers who manage a similar portfolio size.
2. Peter Lynch had to manage a huge portfolio of stocks – more than 1000 shares. In page 239 of his book, he says that it’s best to own as many stocks as there are situations in which (a) you’ve got an edge; and (b) you’ve uncovered an exciting prospect that passes all the tests of research.
Buy Criteria
1. Warren Buffett makes investment decisions primarily using valuation – he buys good businesses/shares where the market value is less than the “intrinsic value”, a figure he appraises using his discounted cash flow model.
2. Peter Lynch buys shares using a number of different approaches, looking at PE ratio, cash position, relative valuation against market, looking at whether you have an “edge” in the industry etc. He even categorizes companies into 6 types and determines how you should approach each type of investment.
Holding Period
1. Warren Buffett says: “our favourite holding period is forever”.
2. Peter Lynch buys and sells his shares. I do not believe he has any hard and fast rules as to minimum or maximum holding period.
Market Fluctuations
1. Warren Buffett is not concerned about market fluctuations at all.
2. It doesn’t say anywhere but I guess Peter Lynch, being a Portfolio Manager needs to consider things like performance benchmarking and negative investment returns.
Risk
1. Warren Buffet’s concept of risk is that the lower the share price, the lower the risk.
2. Interesting Peter Lynch does not address the issue of risk much in his book.
The Economy
1. Warren Buffett ignores the economy when making investment decisions.
2. Peter Lynch takes the view that it is more or less impossible to predict the economy, but he does say that “practical economists are economists after my own heart”, for example “those like Ed Hyman at CJ Lawrence who looks at scrap prices, inventories, railroad car deliveries.” I believe Lynch considers some indicators to be important too.
Comfort Zone
1. Warren Buffet stays away from tech stocks generally, things that he does not understand.
2. Peter Lynch seems to be more open saying that he discovered some of his best stocks through eating and shopping. In fact in Page 11 of his book, he describes how he missed out on the Amazon.com opportunity even though the company was easy enough to understand. He admitted that he was not flexible enough to see the opportunity in its new guise.
As you can see both Buffett and Lynch are very different investors, yet both have outstanding track record. I believe the lesson here is that you can still develop your own investment style which works for you.
Our market in Bursa Malaysia is very different from Wall Street. For example, utility companies which may be deemed safe in western countries are sometimes subject to political whims and fancies in Malaysia. Yet many of the IPPs and other utilities have huge borrowings. I guess time will tell whether such utilities can be considered a “safe investment”.
December 1st, 2008 at 8:15 pm
hey thanks for differentiating both out =)
anyway, by end of the day, Warren’s style still earns more profits compared to Lynch right?
December 2nd, 2008 at 5:55 pm
Buffet’s method of investing is more flexible as you don’t have to keep tabs on a small portfolio of stocks you are already familiar with.However a modified approach to his investment plan so as to include tech stocks with a strong market standing like microsoft could prove profitable.
December 2nd, 2008 at 6:11 pm
No problem Lisa… it got me thinking too! I’m not sure who makes more money but I believe you’re right. Lynch manages money for other people and they are very different investors.
Wachira – I’d say that Buffett is much more stringent in his requirements. It’s not easy to be a company that WB wants to invest in. Whereas Peter Lynch would turn over just about any rock to see whats underneath!
December 2nd, 2008 at 10:03 pm
First of all I don’t believe Buffet ever said this, but if it’s true that Buffet believes “the lower the share price the lower the risk” then he’s actually a lucky clown, for two clear reasons.
First, the statement is empirically false. If it were true, then penny stocks would be a lower risk. In fact, they are the most risky stocks. But even if you carve out an exception for penny stocks, it’s still not true. Lower priced stocks are not lower risk than higher price stocks. And if Buffet is so stupid to believe they are, he doesn’t deserve to invest other people’s money.
Second, his own company, Berkshire Hathaway, is one of the highest priced stocks on the stock exchange. Would he be so stupid as to design stock picking criteria that his own company fails to meet? If true, then he’s a clown and a circus dog.
December 3rd, 2008 at 12:32 am
Bursa is small & not mature therefore cannot apply same rules like that of Wall Street. Furthermore many big companies in Bursa are semi government and being run like government dept.
December 3rd, 2008 at 11:38 am
WB is one of my idol. I think he is not only good at investing but he is also wise and good at predicting human nature. He recently said “Be greedy when people are fearful and be fearful when people are greedy.” So so so true. Right after that he invested in GE and Goldman Sach couple of months ago. We cannot use his model on investment because the stocks he invested are preferred stocks with good dividends returns yearly. We do not get that privileges….I guess there is an advantage being WB. And lastly…he believe in investing in US companies now.
December 3rd, 2008 at 4:26 pm
Buffett who?
December 3rd, 2008 at 7:54 pm
if i am not wrong Buffet earns more than Lynch
March 4th, 2009 at 10:16 pm
i agree with donna Shellout, What i understand one of WB philosophy are Fair Price.
March 5th, 2009 at 2:32 pm
Lets say you want to buy IOI Corporation shares and it is now RM3.60. It would be a lot less risk if you buy it at RM2.00 compared to buying it at RM3.60 I guess. This is the Buffett concept of risk.
March 13th, 2009 at 9:45 pm
If compare with annualized return, Peter Lynch return is much higher than Warren Buffett. Buffett is one of world richest man is because he start as early as 11 years old already start investing.
In personally, I prefer Buffett investing style, and think Peter Lynch investing style is too hard to learn for mediocre investor like me
March 14th, 2009 at 12:58 pm
Warren Buffett is way way way richer….
Nuff said….
Warren Buffett wins…
Ahem…
August 31st, 2009 at 6:29 pm
For what warren buffett means “the lower the price, the lower the risk”, he hasn’t literally said this… and intuitively what he meant should be understood in a relative term, the lower the price compared to the intrinsic value, the higher the margin of safety, which means lower risk of losing money. Of course, there are so many other factors that would affect the value of a company, that is why Buffett only invested in business that he understands and the profitability of the company can be predicted, with long history of consistent good cash flow, high return on invested capital, that leads to his emphasis on economic moats (or competitive edge) the company has to sustain the high ROIC. Then, let the law of compounding return rolls to create magic.