Don’t Invest Like Warren Buffett
Nobody questions Warren Buffett’s investment ability. He is a singularly talented investor, business man, and one of the most respected men in the world. When Buffett talks, people listen. There are plenty of Buffet-mimickers out there. When he buys Bank of America, they buy Bank of America. When he buys railroads, they buy railroads. That doesn’t mean you should blindly follow his picks, however. Buying what Buffett buys is a likely path to subpar returns. Why? Buffett runs a $200 billion company. The list of companies he can even consider buying stock in is but a tiny subset of the investable marketplace. You can bet if he were you, Buffett would be investing quite differently.
Buffett Wishes He Were You
Ok, maybe that’s not entirely accurate. I’m sure Buffett rather enjoys his billions of dollars and the respect he commands from his peers and rivals alike, but that’s another topic. Strictly speaking in terms of investing, Buffett is jealous of you. He’s jealous of your small portfolio (suspend your disbelief, please), of your flexibility, of your ability to take large positions in small companies, and your ability to ignore mundane details such as a stock’s liquidity and treat the market as a black box. If you want to buy a stock, you buy it. If you want to sell, you sell. That’s that. You don’t have to worry about spacing your activity out over a few days so as to avoid driving up the price of the very stock you’re trying to buy. You can ply your trade in the less efficient corners of the market, such as small or micro-caps and special situations. Buffett has none of these advantages.
Warren Buffett is forced by circumstances to invest in large-cap, heavily traded blue-chip companies. There’s nothing wrong with this, but it’s extremely difficult to generate market-beating returns over the long term when you’re competing with every other institution to buy a stock covered by 40 analysts. Buffett has been reportedly claimed in the past he could generate returns upwards of 50% per year provided he only had $1 million in order to in micro-cap stocks. You have a huge advantage over the pros. Don’t spoil it by copying them. If you want some Buffett exposure on your portfolio, buy Berkshire Hathaway stock. But when it comes to your own individual stock selections, you would be better served sticking to areas where you have an advantage. Buy small companies. Buy profitable companies with sound fundamentals but that aren’t yet followed by Wall Street. This is where you’ll make your fortune, not in mega-caps like Coca-Cola or Home Depot. Don’t try to compete with Buffett because trust me, he’s smarter than you.
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“so as to avoid driving up the price of the very stock you’re trying to sell” – you mean “to buy”?
I’m not sure that Buffet would be too impressed with the lack of access to management he would have with only a million bucks to spend.
I’d bet against him getting 50%+ if he only had a million.
Mike
Oops, typo. Thanks.
Mike, I’m not sure how often he actually takes advantage of his access to management when buying stocks. He bought his stake in PetroChina after reading the latest annual report and without doing any other due diligence. He certainly talks to management when he buys companies outright, but even then I’d be surprised if he spent more than a couple of hours with them.
I think I’d rather have a billion dollars making a 4% return rather than $10,000 making a 30% return.
Can’t argue with that.
Kyle is right on the money; I was just in Omaha (met the man, signed the t-shirt … Woodstock for Finance … rock on!) and he openly says that the guy with $1 Mill. will make MUCH better returns than himself … in exactly the ways that Kyle recommends.
The alternative is for ‘dumb money … to become smart money’ [Warren's words] by dollar-cost averaging into broad-based Index Funds: there is NO in-between!
From now on, Kyle, you can also write MY blog