All individual investors who are keen on stock picking in the U.S. stock market can ask themselves this question before making their investment decisions: How do my stock selection and market timing abilities compare to Warren Buffett's?

Why pose this question? This is because any retail investor can choose to buy Berkshire Hathaway shares or decide to trade stocks on their own. If they opt for the former, it's akin to entrusting their money to Buffett to invest on their behalf.

Few retail investors would be arrogant enough to believe they are superior to Buffett. This is primarily because his performance speaks for itself. What's commendable about Buffett is that his investment performance is publicly verifiable. On this count, the vast majority of so-called investment legends worldwide cannot match him. For instance, from the beginning of 1965 to the end of April 2024, over a span of 59 years, the S&P 500 index had an annual return of 10.2%, while Berkshire Hathaway's stock price had an annual return of 19.8%, which is approximately double that of the S&P 500 index. Assuming one had invested $1,000 in Berkshire Hathaway at the start of 1965, by the end of April 2024, that $1,000 would have grown to around $42.55 million.

Some readers might argue that comparing performance accumulated from five or six decades ago is too distant a time, as I wasn't even born then and couldn't have invested in the 1960s. However, even when we look at the most recent decade, Berkshire Hathaway's stock performance has been quite impressive. For example, from August 23, 2014, to August 25, 2024, over a decade, Berkshire Hathaway's stock had an annual return of 12.8%, exceeding the S&P 500 index's annual return (10.98%) during the same period. Although the margin of outperformance is not as significant as mentioned for the 1960s and 1970s, considering the higher market efficiency in the last 20 years, the difficulty of consistently outperforming the stock index for over a decade is much greater than in the last century.

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It's worth noting that Buffett has repeatedly advised retail investors in public to give up stock picking and market timing, and to be content with buying and holding S&P 500 index funds for the long term. However, Buffett's own investment approach is replete with stock selection and market timing.

Assuming Berkshire Hathaway's market value is $100, about $29 of that is in cash. This means that Buffett is not fully invested but has only deployed about 70% of his ammunition. The most accurate way to gauge an investor's optimism or pessimism about the market is to look at their holdings. This data is more persuasive than any words they might speak. From the cash ratio in Buffett's holdings, it can be seen that his expectations for the U.S. stock market are somewhat reserved. The reasons behind this are varied, possibly because he thinks the current market valuation is too high, or there are no stocks he deems worth buying, or for other reasons unknown to outsiders.

Apart from cash, about 39% of Berkshire Hathaway's market value comes from its controlled operating subsidiaries, such as its insurance and energy businesses. These operating businesses have been managed by Berkshire Hathaway for many years and represent true long-term investments, which are unlikely to be subject to market timing transactions like non-operating investments.

Excluding the above two segments, the remaining approximately 32% is Buffett's investment business. Among them, the heaviest positions include stocks like Apple, Bank of America, American Express, and Coca-Cola. Considering the size of Berkshire Hathaway, the number of stocks Buffett chooses to invest in is not large, indicating a very high concentration. This is also one of the investment philosophies he often emphasizes: if one decides to pick stocks, one should adopt a strategy of fewer but better, deeply researching a few industries one is proficient in and choosing a limited number of stocks.

In fact, the only way to outperform the S&P 500 index while maintaining a 30% cash position is to delve deeply and find a few outstanding stocks. That is to say, if Buffett wants to continue his excellent investment performance and consistently outperform the market, he has no choice but to select stocks that can significantly outperform the market and buy at relatively low points and sell at high points.

A good example is the heavy position of Apple in Berkshire Hathaway's investment portfolio. In the first quarter of 2016, when Apple's stock price was around $30, Buffett made a significant decision to invest $1 billion in Apple shares, which accounted for about 1% of Apple's market capitalization at the time. Since then, Buffett has gradually increased his holdings, and by the first quarter of 2024, Berkshire Hathaway held about 5.8% of Apple's stock. At this point, Apple's stock price had risen significantly to nearly $200 per share, bringing substantial returns to Buffett. However, in the second quarter of 2024, Buffett suddenly decided to reduce his Apple holdings by 50%, which surprised the market. From this series of operations, it is not difficult to see that Buffett not only picks stocks but also frequently engages in market timing operations. On the one hand, he emphasizes the importance of long-term investment, such as his holdings in Coca-Cola and American Express, which have lasted for several decades. On the other hand, Buffett is not constrained by long-term investment philosophy and is decisive when it comes to selling stocks, selling when he decides to sell.By studying Warren Buffett, we can draw a significant conclusion that to outperform the market and achieve better investment returns than indices like the S&P 500 is far more challenging than most people imagine. Any average retail investor, regardless of their investment team's knowledge and experience, information and capital advantages, or relationships with brokers and banks, is far from being on par with Buffett. Therefore, obtaining excess returns over market indices is almost impossible. As the saying goes, "Know yourself and know your enemy, and you will never be in peril." The first step for a smart investor is to recognize their strengths and weaknesses, play to their strengths and avoid their weaknesses, and persist in being a rational investor rather than a gambler.