Beat Warren Buffett

Warren Buffett likes to remind us that he likes easy one-foot hurdles he can step over rather than having to jump over the higher ones. He's referring to companies that are easy to understand and provide a lot of downside protection. It's easy to make money if we can find these easy-to-step-over hurdles!

However, for us non-Buffetts, finding these safe money-making investments is not that easy -- and Buffett admits it's getting tougher for him as well. Investment is about taking risks and, of course, managing them.

So how can you and I beat Warren Buffett at his own game? Not by doing better research than him on public companies. Nor by buying big, private ones either.

Be where Buffett cannot be

Both you and I have an advantage over Buffett: we live in different places, buy different products, surf different websites, have different tastes and most importantly, we come in contact with new, small, local businesses that Buffett cannot cover!

What does this mean? Should I be buying small start-ups?

Why not?

Be an angel to small businesses and start-ups

I'm not advocating you go door to door trying to buy your local landscaper or butcher shop. But you can be a small angel investor in small businesses if you simply ask them. Many business owners will be happy to take your money. All you have to do is find one that you believe in. And you have the tools for that, and Warren Buffett doesn't: you already buy their services or goods or know about their future products or services first-hand, by word-of-mouth and local publicity.

Angels don't have to be those who can offer multi-million dollar deals or even hundreds of thousands. I once read a short biography of a successful entrepreneur named David Portes, who started out by selling candy on the streets, with borrowed money -- ten dollars. By the time I read about him, he was already making more than a hundred thousand a month from teaching marketing seminars and his candy-selling business. Those ten bucks came from an angel -- who, given the circumstances, didn't think of himself as an angel. But he effectively was.

You too can be an angel investor to perhaps someone in your family or a friend. Yes, investing in start-ups and small businesses can be a huge risk. But if you do your due diligence as you would do on a big business(*), you have an edge over Buffett and over Wall Street that not very many people have.

Think about it, how many people knew about Bill Gates when he was just a kid with a computer? It's true that for each Bill Gates there are thousands of Broke Bobs and Bankrupt Sams out there. Your job is to find the ones that are competent, that have a great product or service, a lot of energy and integrity and most importantly, whom you trust.

Being an epic investor is about looking where others aren't.

* Remember, in this blog, we never recommend you invest blindly in anything, big or small, new or established -- you still need to do the scuttlebutt to find a suitable business that qualifies for your investment.

Disclosures: None.

Philip Fisher's Investment Method

Philip Fisher, author of the classic book such Common Stocks and Uncommon Profits was known for his successful career investing in growth stocks and for his "scuttlebutt" approach to investing, which is not unlike what Peter Lynch used to do when he managed Fidelity's Magellan fund.

In chapter 10 of Common Stocks and Uncommon Profits Fisher explains how he went about making investment decisions. Here's a summary. First, he needed an idea. About one-fifth of his ideas came from investment houses, analysts, businessmen and scientists who happen to know about a particular industry. The other four-fifths came from reputable and respected professional investors themselves. Then, with the idea in mind, he did not pour over past annual reports and spends hours on detailed financial data. He simply checked the balance sheet and took a first look at the financials, to make sure the company was sane. He also did not talk to management at this point. He did instead go out doing his "scuttlebutt" method.

The "scuttlebutt" method consists of calling his network of business executive-scientists, calling competitors, suppliers, former employees, and customers of the company in question. He asked questions and used the answers to form a picture about the company and its future, often cross-referencing pieces of information from different sources, to validate its veracity. He found out how well-managed the company was, what its competitive advantages were and how well it was respected by competitors, customers and suppliers. If Fisher could not get at least 50% of his required investment criteria at this point, he would give up and move on to something else.

Only when he had at least 50% (and typically, much more) of the information needed to form a positive view on a company was when he would call the company, talk to management and visit factories and assembly lines. Typically, at that stage, about one in two companies he visited he actually invested in. But that only happened if he had enough positive information from his "scuttlebutt" approach first.

When asked whether retail investors should be expected to devote that amount of time and energy to investing, Fisher would say "absolutely" and ask the following question: "In what other line of activity could you put $10,000 in one year and ten years later be able to have an asset worth from $40,000 to $150,000? Is it either logical or reasonable that anyone could do this with an effort no harder than reading a few simply worded brokers' free circulars in the comfort of an armchair one evening a week?"

In a future post, I will talk about Fisher's 15-point investment criteria and discuss some of his other insights.