Investors and analysts spend a considerable amount of time combing through the investments of Warren Buffett (Trades, Portfolio) and the developments within his portfolio at Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial).
Investors also spend a lot of attention and time monitoring the investments of his right-hand man, Charlie Munger (Trades, Portfolio), who primarily invests through the Daily Journal (DJCO, Financial). I say "primarily invests" because he has said that he only owns two to three investments outside the Journal, including Berkshire and Costco (COST, Financial). We know he does not trade much, so it does not seem sensible to suggest that he would be trading in and out of these positions.
Investors and analysts spend a lot of time analyzing the equity holdings of these billionaires, but I think they spend too much time concentrating on the "what" rather than the "why."
'What' vs. 'why'
Only considering 'what' Munger and Buffett bought without asking 'why' ignores Buffett's first rule of investing, "Never lose money."
The easiest way to lose money as an investor is to buy something one does not understand. Therefore, by ignoring the 'why,' one may end up buying something one does not understand, and this could incur a permanent capital impairment.
Buying something one does not understand is probably the most straightforward way for investors to go astray. This is not just limited to equities. Whether it be real estate, cryptocurrencies, or venture capital, the investor is running the risk of losing money whenever they get involved with something they do not understand.
Some investors might ask why this is a risk if Buffett or Munger already own the stock. After all, many would consider these to be the best investors of all time. Surely, they wouldn't make a mistake?
While it is true that both of these investors have a tremendous track record, it is entirely incorrect to say that they have never made a mistake. We have far more information on Buffett's track record, so it is far easier to pick out mistakes for the billionaire than it is for his right-hand man. The Oracle of Omaha has made thousands of investments throughout his career, some of which have worked out incredibly well. Others have not. In recent years some of his biggest failures were IBM (IBM, Financial) and the UK retailer Tesco.
Where Buffett and Munger really excel is not so much the picking of investments (although they are very good at this), but staying with the good investments and casting off the bad.
Focus on the winners
The most successful investments in Berkshire's portfolio are those that have been left to grow year after year. They have been left alone even as other holdings have drifted in and out of the portfolio.
This is why it is imperative to know the 'why' behind investment decisions made by Munger and Buffett. The Oracle of Omaha has said there are only two reasons why he would sell a stock: because he wants the money for something else, or because the situation has changed.
If an outside observer does not know why Buffett bought the stock for the portfolio in the first place, they cannot determine if or when the situation has changed. The only time they will find out is when Berkshire reports the position change on its 13F. By then, it could be too late.
All in all, there is absolutely nothing wrong with copying the investment decisions of Munger and Buffett if investors can understand for themselves why these billionaires decided to take that course of action.
If not, buying a stock just because someone else has is speculating. That is virtually the same as gambling, and when one gambles, there is never any guarantee of a positive outcome.
