Warren Buffett, arguably the greatest investor of all time, once told his shareholders: “Lethargy, bordering on sloth, remains the cornerstone of our investing style.”

What he meant was, once he finds an investment he likes, his intent is to “buy and hold” forever.

He wrote that comment in 1996 when his net worth was a paltry $16 billion. A quarter-century later, the lethargic, sloth-like investor’s net worth exceeds $100 billion.

Buffett runs Berkshire Hathaway, originally a textiles company, later an insurance company, now a multinational conglomerate. Berkshire Hathaway invests in other companies, sometimes as a passive investor in a publicly owned company, sometimes taking companies private.

Buffett is a deep-value investor, meaning he prefers stable, boring companies like Coca-Cola and American Express over roller coaster companies like Facebook (now Meta Platforms). 

Given his stature and reputation, Buffett gets to see the best ideas first but only moves forward if he believes he is investing at a deep discount to intrinsic value.

Benjamin Moore Paints, acquired in 2000 after 117 years as a stand-alone company, represents a typical Buffett transaction.

Why Is “Lethargy Bordering On Sloth” Such An Effective Investing Technique?

A large part of what makes Buffett so successful is he knows how to identify companies that have a legitimate value proposition and a proven track record of success.

But equally important is his holding period.

“Holding period” refers to the length of time you own a stock before selling it.

If you sell a stock less than a year from the time you bought it, your gains are subject to an income tax rate of as much as 35%. If you hold for more than a year, your earnings are reclassified as capital gains and are thereby subject to a lower tax rate — 20% for top earners.

If you continue to hold and hold and hold, your effective tax rate gets lower and lower. Paying the 20% capital gains tax on five years of gains means the per-year tax is 4% (20% divided by five years).

The longer you hold, the more time you give your stocks to grow, and the less you divert to taxes. You do not need to be Warren Buffett to cultivate a net worth of impressive proportions as long as you follow his simple prescription.

How To Distinguish An Investment From A Trade

Inexperienced investors think of investing as buying in hopes of rapid, short-term growth, and selling when that growth happens. We call that trading.

Trading isn’t all bad.

Last year, one of my clients had a large position (about 50,000 shares) in a company called Solar Window Technologies. The company’s product is a film that is applied to exterior glass and converts entire buildings into solar panels. My client is an architect, so he had a special attraction to this company.

In the middle of 2020, the shares were worth about $1.50 each. As 2020 turned into 2021, the shares rose from $1.50 to $3, then from $3 to $9, and then shot up to $34.47.

Did that mean the company had gone to market with an amazing product? No. The product is still in development.

Solar Window has not yet earned a dime in revenue. However, the stock was caught up in the same meme-stock frenzy that drove GameStop and AMC to ridiculous valuations.

For a brief moment, Solar Window was valued at $2.5 billion.

I prevailed on my client to sell scale-out of half of his position. We did not sell at the top tick of the stock price, but we did extract about $500,000 in cash.

Not long after, the company’s share price slid back to $4.

Always Coca-Cola

Here’s what an investment looks like: Coca-Cola, a company in which Buffett holds 400 million shares.

There’s nothing terribly exciting going on with Coca-Cola in terms of new products. Coca-Cola sells fizzy sugar water, occasionally coming up with brand extensions, with diversification limited to water and fruit juice. Over the last 15 years, the company has underperformed the industry benchmark and the S&P 500, but still provided 7.3% growth/year from reliably stable returns.

Coca-Cola is a perfectly boring choice to anchor a portfolio. It won’t fluctuate much in rising and falling markets, it doubles in price every 10 years and gives a nice dividend of 3%.

Typically, about half the equity investments in our portfolios are similar value stories. With the anchor in place, we can dial up risk and returns with more speculative growth companies.

David Edwards is president and wealth advisor with Heron Wealth, a $500 million registered investment advisor based in New York City working with 225 client families across the U.S. and around the world. Dustin Lowman contributed additional research for this column. Edwards and/or his clients hold positions in Coca-Cola, American Express, and Solar Window Technologies.