John Hempton recently wrote an excellent piece about why nobody can even come close to replicating how Warren Buffett invests. He notes that even the acolytes don’t pass the sniff test:
Find any investor who models themselves off Warren Buffett and look at what they do.And look at their investments against a twenty punch card test.They fail. They don’t even come close. Several big-name so-called Buffett acolytes have made more than three to five large investments in the last three years and at prices that can’t possibly meet the twenty punch card test. Most phoney Buffett acolytes have been turning stock over faster than that.
The always interesting John Rekenthaler from Morningstar followed this up with some data.
Of course, while every manager desires Buffett’s results, most do not mimic his investment approach. Concentrated, low-turnover portfolios are not for everybody. There are, however, two dozen U.S. stock mutual funds that could reasonably be called Berkshire Hathaway hopefuls. They have large-value or large-blend investment styles, fewer than 25 stock positions, and annual turnover of less than 50%.Their collective results stink. The logic sounds good. Having portfolio managers use their research to best effect by investing only in their favorite ideas, then limiting the fund’s trading costs by holding those securities for the long haul, would seem to make sense. But things do not play out that way.
People want to invest like Warren Buffett, but they know this is not a realistic goal. So instead, they try to invest with Warren Buffett, and many fail at this too. Warren Buffett has virtually 100% of his net worth in Berkshire Hathaway stock, so parking your money next to him isn’t the worst idea in the world. And while Berkshire won’t compound at the 20.8% that it did from 1965-2015, it should still produce a reasonable return going forward.
But here’s the problem, this isn’t fool-proof either. One Berkshire class A share is four times the median household income, so this is for wealthy, educated people, who ostensibly are long-term Buffett devotees. And yet, 59,467 shares have been traded year-to-date, or 7.5% of the shares outstanding. Buffett once said “I don’t want anybody buying Berkshire thinking that they can make a lot of money fast.” Unfortunately, this is exactly what’s happened with the “Baby Berkshires,” which have seen 713,452,219 shares traded so far this year, or 29% of all shares outstanding
29% seems like a lot, and it is, but these investors are the model of discipline when compared with “shareholders” from the other nine largest stocks in the S&P 500.
The lesson here is that everybody needs to find their own way. Forget about being the next Buffett or Livermore or any of the great investors or traders that you’ve grown to worship. You have to make your own mistakes and repeat them several dozen times until you figure out what you’re comfortable with. But if you are hell bent on investing like Buffett, try investing with him, rather than trying to invest like him.