The "Buffett Rule" for Angel Investing

By Wayne Mulligan, on Thursday, April 23, 2015

Warren Buffett has amassed a fortune of nearly $70 billion.

He might well be the most successful investor in history.

Last year, during a CNBC interview, he revealed the secret to his success:

"I have no idea what the stock market's going to do tomorrow or next week or next month or next year.  If you own your stocks as an investment—just like you'd own an apartment, house or a farm—look at them as a business […]

Find a good bunch of businesses and hold them."

But here’s the thing:

Buffett's advice doesn't just work for the public stock market...

It works in the private market, too.

Let me show you how…

Don’t Invest in a Stock — Invest in a Business

Buffett’s strategy is to invest in—and hold onto—good businesses.

He knows that over time, a good business will appreciate in value.

Part of this strategy is to ignore short-term stock price fluctuations.

To follow his advice in the stock market, you’d need to stop yourself from visiting Yahoo Finance—10 times a day? 30 times a day? More?—to see what the general public thinks your investment is worth.

This exercise in self-control becomes even more challenging when, despite your best efforts, you take a peek at Yahoo and learn that the price of a stock is far lower than it “should” be...

Do you hold?

Do you sell?

Do you buy more?

These are tough decisions. For many folks, they can cause a lot of anxiety.

Luckily, Buffett’s advice is easier to follow in the private market...

An Instant “Buy-and-Hold” Investor

With a private investment, there’s no “stock market” where you can pull up a daily price chart...

You build your portfolio of start-up investments over time—and then you wait, just like Buffett, as they mature and find their way to success.

In fact, when you’re an angel investor, you instantly become a Buffett-style “buy-and-hold investor.”

Which is why, to succeed in the private market, you just need to follow Buffett’s advice:

Step 1 — “Find a good bunch of companies..."

Step 2 — “Hold them”

To succeed at the first step, you need to do significant research and due diligence before you make an investment.

What’s “significant” mean? Well, it differs from investor to investor, but here are a few interesting statistics from a study published by The Kaufmann Foundation (the $2 billion non-profit foundation that focuses exclusively on entrepreneurship):

In the largest study ever done on the returns from angel investing, The Kaufmann Foundation found that the median number of hours that angel investors spent doing due diligence per deal was 20 hours.

Angel investors who spent more time than that earned an average of 5.9 times their money...

Meanwhile, investors who spent less time than that barely broke even… and investors who logged more than 40 hours earned an average of 7.1 times their money.

For success with the second step of Buffett’s advice, you need to approach your investments with a long-term outlook—the same sort of view you’d take with your home or a piece of real estate.

If you’ve invested in a good business, over time, it will appreciate in value...

So just hold on for the ride.

The Key? Research, Buy & Hold

So go ahead:

Find a good bunch of start-ups and hold onto them.

Are you concerned about the level of time it takes to do due diligence?

Don’t worry, we can help »

And if you’ve been patient and diligent about your research, like Buffett, you too might enjoy the spoils of success.

Happy investing.

Best Regards,
Wayne Mulligan

Founder
Crowdability.com

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Tags: Equity Crowdfunding Angel Investing Education Warren Buffett

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