There’s no shortage of articles out there detailing the many ways in which you, the average investor, can follow in the footsteps of Warren Buffett (Trades, Portfolio). I certainly have penned a number of them. But it’s important to appreciate that not everything about Buffett’s process can be replicated by the average investor. Here are some of the ways in which the Oracle of Omaha differs from the rest of us.
The size of your pot matters
A common maxim of value investing, and of Buffettisian value investing in particular, is that stocks are not just pieces of paper (or, as is the case these days, pixels on a screen) - they represent part ownership of a real business. Accordingly, value investors should appraise their share purchases through the prism of “what is this whole business worth?” Most of us do not have the hundreds of millions (at minimum!) required to buy out a publicly traded company, however. So for most of us, the "think of this as part of a whole business" exercise is largely theoretical.
Buffett, who of course is the most successful value investor of all time, has access to enormous amounts of capital. This allows him to actually treat shares as ownership in a business, particularly since he prefers to buy companies outright. This allows him to structure deals in a manner that is highly advantageous to Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial). For a recent example of this, look no further than the recent Occidental-Anadarko deal.
Oil driller Anadarko (APC) had already received a buyout agreement from Chevron when competitor Occidental Petroleum (OXY) approached Buffett for help in making a superior offer. Buffett agreed to invest $10 billion in Occidental, contingent on the buyout happening. This was an extremely favorable deal for Berkshire -- on a $10 billion investment, it is estimated that Buffett got back, or is getting, at least $12 billion on the buyout. A 20% return -- not bad! Particularly given that Berkshire has underperformed the S&P 500 over the last 10 years.
Is this an opportunity that would be available to the average investor? Of course not. What makes Buffett able to make deals like this is the enormous pile of cash that Berkshire is sitting on -- currently around $122 billion. And we know he is just itching for an opportunity to deploy it.
The lender of last resort
While the world was falling apart in 2008, Warren Buffett (Trades, Portfolio) was able to make a considerable amount of money by effectively bailing out distressed businesses. For instance, in the wake of the collapse of Lehman Brothers, he bought $5 billion of preferred stock from Goldman Sachs (GS, Financial), and earned warrants for an additional $5 billion of common shares. The preferred stake was redeemed in 2011 at a 10% premium. The warrants were later converted into a $2 billion stake in Goldman. During the crisis, Buffett also helped Mars buy out Wrigley, and was involved in a number of other deals.
Can average investors profit during times of crisis? Yes, absolutely. By adhering to Buffett’s “be greedy when others are fearful” adage, you can buy quality stocks at low valuations. But it’s important to bear in mind that Buffett benefits from a scale that the average investor can never hope to achieve. And that is a key factor in his success.
Disclosure: The author owns no stocks mentioned.
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