3 Ways You Can Beat Warren Buffett in the Stock Market

Warren Buffett is one of the greatest investors of our age, but these days, even he can be beaten by enterprising investors who recognize the incredible challenges he faces in trying to invest. Somewhat a victim of his own success and somewhat due to the requirements of running an insurance business, the Buffett of today is not as invincible as he once was.

Still, Buffett remains a formidable investor who runs a very strong company, and buying shares in the business he leads may very well still be a path to building decent wealth over time. Outperforming him may very well be easier said than done, particularly if the recent market choppiness is a sign of things to come.

As a result, you should focus on the structural challenges Buffett faces when considering ways to invest with the hopes of a higher return. With that in mind, here are three ways you can beat Warren Buffett in the stock market.

Image source: Motley Fool Editorial

No. 1: Hold less cash and bonds

According to its September 2021 balance sheet, Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B), which is the company that Buffet runs, had $920.8 billion of assets. Of those assets, $70.0 billion was in cash, $79.2 billion was in US Treasuries, and $18.1 billion was in ‘fixed maturity securities’ (otherwise typically known as bonds). 

That’s around 18.2% of the company’s total asset base, tied up in things that are not likely earning all that much for the business. As an insurance company, Berkshire Hathaway pretty much has to have a fairly large asset base in cash and high-quality bonds. After all, if it faces an unexpectedly large set of claims at a time when the financing market dries up, it still has to pay those claims if it wants to stay in business for the long haul.

Unless you’re in a situation where you need to rely on your portfolio to cover near term costs, you probably don’t need that much money tied up in assets with such low prospects for returns. Indeed, if you’re still a decade or more away from retirement, you may be able to get away with just keeping an emergency fund in cash and having everything else invested more aggressively.

If you assume that over the long run, stocks will return more than fixed income and cash, then simply by not carrying so much fixed income and cash on your personal balance sheet, you get a leg up on Buffett. Both the structure of the insurance business he runs and his preference to use cash during a crisis to load up on deals mean that it’s harder for him to deliver market-beating returns during normal times.

No. 2: Look for smaller companies with more growth potential

Buffett himself admits that Berkshire Hathaway faces a substantial size problem. With over $900 billion in assets, the company really needs to make investments measured in the billions for those investments to have any discernable impact on the business overall. This is a key reason why such a large part of Berkshire Hathaway’s portfolio…