How can an investor imitate Warren Buffett's great investment strategy? If you ask him he would answer: “Buy shares of Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial).” That is clearly the best answer.
However, an investor can learn much more if he tries to purchase shares on his own or through a mutual fund. Buffett has tactics. What about the first question? Putting all the money in Berkshire Hathaway? Actually, the company is an insurance company and Buffett is an authority on insurance. The stock is barely exposed to many areas of the stock market and Berkshire has increased to such extent that its future performance is affected.
In a nutshell, it is better for an investor to invest on his own. To start with, the investor can have a smaller portfolio and secondly, he might shoot out the lights by overweighting stocks in whatever field.
According to Buffett, it means “staying in the circle of competence.” An investor can surely learn from Buffett but he cannot imitate Buffett's performance. One obvious reason: Buffett has the money to buy entire companies outright, not just a small piece of a company. In addition, he is engaged in arbitrage, usually purchases preferred stock, and buys bonds and metals. He is also member of the board of directors of some of the companies Berkshire has invested in.
There is another issue difficult to imitate: the group of investors Buffett has across the country and who provide information about any interesting company. Most importantly, Buffett is savvy; he has spent almost his entire life studying businesses and balance sheets and he has been mentored by Benjamin Graham, an expert in investments.
Still, there is a chance that an investor can benefit from studying what Buffett does. There are plenty of books about him and his strategies, as well as his web sites, Internet discussion groups, etc. There is also a Buffett “workbook” that helps people invest like Warren Buffett. This book is targeted at the ordinary investor who can probably do much better if he knew a little more.
Buffett has often said that it’s easy to emulate what he does, and that what he does is very straightforward. He buys wonderful businesses run by capable, shareholder-friendly people, especially when these businesses are in temporary trouble and the price is right.
Buffett buys when he sees stocks that are powerful and can still dominate their industries. He confines his choices to stocks in industries that he is thoroughly familiar with. He will gather as much information as possible and will study the company's CEO. He will try to discover any mistake he may have made.
The worst thing for Warren is risk. Beyond that he tries to avoid mistakes ordinary investors make: buying the most glamorous stocks when they’re at the peak of their popularity; selling whatever temporarily falls out of favor and thus following the crowd (in or out the door); attempting to demonstrate versatility by buying all manner of stocks in different industries; being seduced by exciting stories with no solid numbers to back them up; and tenaciously holding onto his losers while shortsightedly nailing down the profits on his winners by selling.
However, not all of his strategies should be followed, especially, Buffett's trend to buy only relatively few stocks. A concentrated portfolio, in lesser hands, can be a time bomb. There’s a law for the lion and a law for the lamb.
Of course, over-diversification is something that gifted investors should steer clear of. But under-diversification, owning just a few securities, is something that ungifted investors (in whose ranks I happily serve) should also avoid like the plague.
Luki Vail, a certified financial planner once wrote a book called: "Invest Like Warren Buffett, Live Like Jimmy Buffett: A Money Manual for Those Who Haven’t Won the Lottery (Secaucus, NJ: Carol Publishing Group, 1996)." She is recommending that readers of her book not swing for the seats but bunt for singles. That’s no doubt sensible counsel for her readers, but it is not the Warren Buffett way.
In a word, an ordinary investor may have a core portfolio with large-company index funds making up 50% of the entire stock portfolio. Outside such portfolio, the ordinary investor can imitate the strategy of the greatest investor of these times.
However, an investor can learn much more if he tries to purchase shares on his own or through a mutual fund. Buffett has tactics. What about the first question? Putting all the money in Berkshire Hathaway? Actually, the company is an insurance company and Buffett is an authority on insurance. The stock is barely exposed to many areas of the stock market and Berkshire has increased to such extent that its future performance is affected.
In a nutshell, it is better for an investor to invest on his own. To start with, the investor can have a smaller portfolio and secondly, he might shoot out the lights by overweighting stocks in whatever field.
According to Buffett, it means “staying in the circle of competence.” An investor can surely learn from Buffett but he cannot imitate Buffett's performance. One obvious reason: Buffett has the money to buy entire companies outright, not just a small piece of a company. In addition, he is engaged in arbitrage, usually purchases preferred stock, and buys bonds and metals. He is also member of the board of directors of some of the companies Berkshire has invested in.
There is another issue difficult to imitate: the group of investors Buffett has across the country and who provide information about any interesting company. Most importantly, Buffett is savvy; he has spent almost his entire life studying businesses and balance sheets and he has been mentored by Benjamin Graham, an expert in investments.
Still, there is a chance that an investor can benefit from studying what Buffett does. There are plenty of books about him and his strategies, as well as his web sites, Internet discussion groups, etc. There is also a Buffett “workbook” that helps people invest like Warren Buffett. This book is targeted at the ordinary investor who can probably do much better if he knew a little more.
Buffett has often said that it’s easy to emulate what he does, and that what he does is very straightforward. He buys wonderful businesses run by capable, shareholder-friendly people, especially when these businesses are in temporary trouble and the price is right.
Buffett buys when he sees stocks that are powerful and can still dominate their industries. He confines his choices to stocks in industries that he is thoroughly familiar with. He will gather as much information as possible and will study the company's CEO. He will try to discover any mistake he may have made.
The worst thing for Warren is risk. Beyond that he tries to avoid mistakes ordinary investors make: buying the most glamorous stocks when they’re at the peak of their popularity; selling whatever temporarily falls out of favor and thus following the crowd (in or out the door); attempting to demonstrate versatility by buying all manner of stocks in different industries; being seduced by exciting stories with no solid numbers to back them up; and tenaciously holding onto his losers while shortsightedly nailing down the profits on his winners by selling.
However, not all of his strategies should be followed, especially, Buffett's trend to buy only relatively few stocks. A concentrated portfolio, in lesser hands, can be a time bomb. There’s a law for the lion and a law for the lamb.
Of course, over-diversification is something that gifted investors should steer clear of. But under-diversification, owning just a few securities, is something that ungifted investors (in whose ranks I happily serve) should also avoid like the plague.
Luki Vail, a certified financial planner once wrote a book called: "Invest Like Warren Buffett, Live Like Jimmy Buffett: A Money Manual for Those Who Haven’t Won the Lottery (Secaucus, NJ: Carol Publishing Group, 1996)." She is recommending that readers of her book not swing for the seats but bunt for singles. That’s no doubt sensible counsel for her readers, but it is not the Warren Buffett way.
In a word, an ordinary investor may have a core portfolio with large-company index funds making up 50% of the entire stock portfolio. Outside such portfolio, the ordinary investor can imitate the strategy of the greatest investor of these times.
