Why You Can’t Invest Like Warren Buffett

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 1,000,000%! 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.

wb1

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.

wb2Source: 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
  • IBM
  • 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.

wb4 “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.

January 2, 2021 Update: We have just announced our BEST STOCK NEWSLETTER of 2020 AWARD!

CLICK HERE to find out which stock newsletter was up 78% in 2020 (and whose 2019 picks are now up 113%).

*** Our Award for BEST STOCK NEWSLETTER of 2020 ALERT ***

Updated January 2, 2021

At WallStreetSurvivor, we subscribe to dozens stock recommendation and advisory newsletters. There is ONE newsletter that is constantly outperforming all of the others--The Motley Fool Stock Advisor.

Five of their 2020 stock picks have doubled and the average return of all 24 of their stock picks for 2020 is up 78%!

We have been tracking ALL of the Motley Fool stock picks since January 2016. That's 5 years and 120 stock picks. As of Friday, January 1, 2021 the Motley Fool's January stock pick (TSLA) is up 720%, their March pick (ZM) is up 172%, their April pick of SHOP is up 226% and their June pick CRWD is up 120%; and another two have more than doubled. In addition, 10 of their 2019, 12 of their 2018, 11 of their 2017, 15 of their 2016. Most impressively, over the last 5 years that we have been tracking every recommendation, their average stock pick is up 209%--tht means over the last 5 years their stock picks, on average, have TRIPLED!

Now no one can guarantee that their next picks will be as strong, but our 5 years of experience has been super-profitable. The important thing about the Fool stock picks is you have to buy them the day they are recommended because they usually pop 5-10% in the first 72 hours after the release their recommendation. You sure don’t want to risk missing out on their next pick.

Normally the Fool service is priced at $199 per year but they are currently offering a NEW SUBSCRIBER DISCOUNT that allows you to get theiir next 24 stock picks for just $99/year. HERE is the LINK to visit their New Subscriber Discount page.

CLICK HERE to get access to all The Motley Fool’s Stock Picks and their next 12 months of picks for just $99 per Year! 



GET UP TO $1,000 IN FREE STOCK

WHEN YOU OPEN A ROBINHOOD BROKERAGE ACCOUNT

Robinhood was the first brokerage site to NOT charge commissions when they opened in 2013. They just past 10,000,000 accounts and to celebrate they are offering up to $1,000 in free stock when you open a new account.

Here’s the details: You must click on a special promo link to open your new Robinhood account. Then when you fund your account with at least $10, you will receive one stock valued between $5 and $500. Then, you will get a link to share with your friends. Every time one of your friends opens an account, you will receive another free stock valued between $5 and $500. Click here to learn more about this Special Robinhood offer.

Claim your free stock NOW (before it’s too late)



Comments are closed.