Warren Buffett is the highest profile Value Investor there is today. He has legions of followers that track his every move. There are so many people watching what he’s doing and mimic his investment activities that his trades are not made public for several months after they take place so as to not affect the values of the companies he invests in. His annual report and shareholders meeting in Omaha is attended by tens of thousands of people. People are so interested in his opinions about investing that his annual charity auction for the privilege of having dinner with him goes for millions of dollars. He has even coined several popular investment terms that have become part of the investing lexicon. Needless to say he is an influential investor, and the reason for that is that he consistently out performs the market. So how do you go about investing just like him?
Investing Like Buffett
There are several ways to invest like Warren Buffett… but I will save you the suspense and tell you right away that you can’t invest just like him. Buffett invests in businesses and has the means to be able to purchase entire companies that are often worth billions of dollars. He has a vast amount of resources at his disposal and recently said that he’d like to keep about $20 billion of cash on hand at all times. One of his strategies is to use the cash from the premiums from his insurance companies like Geico to invest in other businesses. That strategy has enabled Berkshire Hathaway to become a diversified conglomerate under his direction. Berkshire Hathaway has over 50 subsidiaries including well known brands like Geico, Sees Candy, Heinz, Fruit of The Loom, International Dairy Queen, BNSF Railway, and NetJets.
Buffett is also known to invest in individual stocks. His investment philosophy for stocks is the same as it is when buying entire companies and he has acquired a portfolio of 45-50 stocks with over $100 billion. Many of his stock purchases are done in the open market, however, there have been cases where he is able to buy preferred stock with special dividends that aren’t available to average investors. In 2008, during the economic downturn Goldman Sachs offered Buffett the opportunity to invest $5 billion in preferred stock paying a 10% dividend for 5 years and the option to purchase another $5 billion of common stock with a strike price of $110 per share. At the time that investment was a vote of confidence from one of the greatest investors that Goldman Sachs was a solid and stable company after the financial crisis.
Mirroring Buffett’s Performance
While there are things that Buffett can do because of the vast amount of resources available to him
that are out of reach for average investors it is be possible to mirror his stock trades to attempt to replicate his performance. As of the date of this blog post his portfolio includes the following companies:
|Company||Ticker||% of portfolio|
|WELLS FARGO & CO NEW||WFC||24.67%|
|COCA COLA CO||KO||14.64%|
|INTERNATIONAL BUSINESS MACHS||IBM||12.07%|
|AMERICAN EXPRESS CO||AXP||10.99%|
|WAL MART STORES INC||WMT||3.99%|
|PROCTER & GAMBLE CO||PG||3.85%|
|US BANCORP DEL||USB||3.44%|
|DAVITA HEALTHCARE PARTNERS I||DVA||2.85%|
|GOLDMAN SACHS GROUP INC||GS||2.46%|
|DEERE & CO||DE||1.56%|
|CHARTER COMMUNICATIONS INC D||CCMM||1.36%|
|GENERAL MTRS CO||GM||1.27%|
|U S G CORP||USG||1.01%|
There are websites that actively track Buffett’s stock holdings, but just because he currently holds a stock doesn’t mean that you should buy it. It’s possible that Buffett bought those shares a long time ago when they were priced lower. The share price today may no longer be the bargain that Buffett bought in to, so it may not be good idea to go out and buy everything in his portfolio.
That means that while you could use his stock holdings as a way to save time with screening stocks by assuming that Buffett already did his due diligence when it came to assessing management and future strategy, but you will still need to see if the companies are trading below their intrinsic value. If they are, then it’s possible you didn’t miss the boat and you can ride the wave with Buffett. Keeping an eye on his new stock trades will be key, and may be more impactful than buying stocks that are already in his portfolio.
That strategy will allow you to track Buffett’s stock purchases, but it doesn’t help you with taking advantage of the deals where Buffett purchases entire companies. To try to mirror that performance you could purchase Berkshire Hathaway Class B shares (BRK:B). This will mean that if the purchase of a new company benefits the Berkshire Hathaway corporation the share price may also increase.
Problems With the Mirroring Strategy
This strategy may save you some time because you can assume that Buffett did his own research, but it is not without its faults. The 3 main problems are:
- You may be making buy and sell decisions on a different timeline than Warren Buffett. Since his transactions are not disclosed right away you would basically be lagging behind him which could lead to overpaying for stocks.
- Berkshire Hathaway is a business like any other. It has assets and liabilities and it must be evaluated just like any other investment. Purchasing that stock would require the same analysis that other companies go through to determine whether it’s a worthwhile investment.
- It’s lazy. With this strategy you would be placing your faith in someone else’s research that is not familiar with your own unique risk tolerance, asset allocation, or time horizon.
Investing Like Yourself
Ultimately the best investing strategy is one that you’re comfortable with and meets your needs. You can follow the same investing philosophy that Buffett subscribes to, but you don’t necessarily have to do everything he does. As we have previously stated value investing is an investing approach that aims to buy quality businesses that are well managed, have a competitive advantage, and happen to be undervalued by the market. It is the combination of all of those things that makes for an effective value investing strategy. This is especially true since most investors will be purchasing common shares of stock and not have access to the same preferred shares and special dividends that are available to billionaire investors.