Since taking control of Berkshire Hathaway way back in 1964, Warren Buffett has achieved an mind-blowing compounded return of 19.4% per year. That means that between 1964 and 2014 Berkshire Hathaway’s stock price increase by 1,800,000%! The S&P 500 over the same time period increased by 2300%. That is the level to which Buffett has crushed the market.
Warren Buffett is one of the most successful investors of all time. He’s also one of the world’s richest men; going toe to toe with Bill Gates for top spot on the Billionaire’s List for a while now. The “Oracle of Omaha” is the chairman, CEO and largest shareholder of Berkshire Hathaway, a multinational conglomerate. Buffett’s annual letter to shareholders is often taken as the definitive word on investing. Buffett’s mix of folksy wisdom and storytelling has made him endearing.
Naturally because of this insane performance, there are people who want to pick apart his success, to try and replicate his method. You should invest like Warren Buffett, people say. It’s intoxicating to believe that if you study the greats that you would be able to mimic their results. After all, if you Google the phrase “Invest like Warren Buffett”, you get 2.7 million results!
Here’s the problem. You can’t invest like Warren Buffett.
The common investor has no chance of achieving the success of Warren Buffett. I don’t say that to be mean, only to illuminate the incredibly special position Buffett enjoys in the investing world. Buffett is an anomaly; he is part private-equity deal broker, part investment bank, and activist investor.
There are investors in this world that can move markets just by speaking. That’s the kind of weight Warren Buffett carries. In 2013 billionaire investor Carl Icahn tweeted that he had bought Apple shares, writing “We currently have a large position in Apple. We believe the company to be extremely undervalued. Spoke to Tim Cook today. More to come ”. This tweet was enough to send people rushing to buy Apple stock, moving it up by as much as $17 billion.
Source: Business Insider
That is the kind of influence Warren Buffett has. If he wanted he could manipulate the market the way Carl Icahn did, instigating a herd mentality and driving up shares in any stock he likes, before quickly dumping his holdings and making an easy score.
What if I invest in the stocks Warren Buffett invested in?
Warren Buffett is the head of Berkshire Hathaway (NYRSE: BRK), so for those of you who think we should take a look at what the company owns and just buy that – let’s look into it. Berkshire Hathaway is a public company and releases its public equity holdings every so often. The company invests over $100 billion in that portfolio with more in private holdings.
Here are some of the holdings in the Berkshire Hathaway portfolio.
As of November 2014, approximately 58% of the total Berkshire Hathaway equity portfolio was made up just 4 stocks:
- Wells Fargo & Company
- The Coca-Cola Company
- American Express
Over the last ten years a share of BRK has increased 149%. The top 4 holdings, on the other hand, are up:
- Wells Fargo, up 71%
- IBM, up 64%
- Coke, up 109%
- American Express, up 83%
Not a single one of the top 4 holdings have increased in value as much as the actual company that owns them. How is that possible?
Could the difference be made up from the rest of the portfolio?
Here are several other companies that Berkshire owns shares of in large amounts as well as how much they have increased in value:
- ExxonMobil, up 86%
- Proctor & Gamble, up 61%
- Walmart, up 61%
- US Bancorp, up 40%
And so on it goes, with the performance declining from there.
So, it’s pretty clear that the growth in Berkshire’s stock price isn’t fuelled purely by its equity investments. How is it then that the holding company is doing so much better than the stocks it owns?
It Takes Money to Make Money
Berkshire Hathaway is not just a hedge fund.
Warren Buffett is not just a hedge fund manager.
Berkshire Hathaway makes money from other ventures, in deals that you and I would never have access to in a million years.
In 2008, we were in the midst of an economic meltdown and General Electric was in huge trouble. They needed to raise huge amounts of cash fast – or face bankruptcy. Enter Warren Buffett.
Mr. Buffett was able to lead the investment in GE – taking a $6 billion position. He was also able to negotiate incredibly generous terms. In addition to taking ownership of common shares, the Oracle of Omaha was given $3 billion in preferred shares with a guaranteed dividend of 10%. For perspective, GE’s dividend yield is 3.37% right now.
Additionally, the investing giant was given an option to buy up to another $3 billion in GE shares at a fixed price of $22.25 per share NO MATTER WHAT the price of the stock might have been.
Buffett was able to do this because Berkshire Hathaway was sitting on a mountain of cash and was able to deploy it quickly. There were plenty of deals just like this during the 2008 recession, where Warren Buffett was able to swoop in and negotiate incredible terms because he was the one holding the purse strings. What was GE going to do? Not take the money and go bust?
The former world’s richest man made $1.2 billion on that deal.
“It’s a huge structural advantage to have a lot of money. I think I could make you 50% a year on $1 million. No, I know I could. I guarantee that.” - Warren Buffett
There are other deals just like that.
Previously Buffett had worked to acquire Heinz for $23 billion. In the process of doing so, Buffett received special preferred shares paying a delicious 9% dividend. In 2014 alone, Berkshire pulled in $720 million from these assets.
The Sad Truth
It is important to see how being an investor for a corporate conglomerate differs from being a private individual investor. You and I can buy shares in the hundreds; Buffett buys in the millions. He can move markets the way he wants to just by speaking about them, and has a pile of cash ($65 billion) to leverage and wield influence with.
It’s easy to see why so many are seduced by the most successful investor of our lifetimes. It’s still possible to make money in the markets following Buffett’s tenets of long-term and value investing, but you must be aware that you will never achieve the outsize results that he does. For the average investor, it will be a grind; 5% returns one year; 7% in a good year.
None of us can invest like Warren Buffett, and that’s the truth.