Invest Like Warren Buffett

On 12/06/2009, in Investment Strategies, by Jordan Wilson

Want to mimic the value investing style of famed investor, Warren Buffett?

This Globe and Mail article examines how to invest like Mr. Buffett.

The article references Validea, a company that allows you to track model portfolios each based on the philosophy of a different investment guru. Not interested in Warren Buffett? There is always Peter Lynch, Martin Zweig, and others to emulate. Subscription cost is a little rich for my taste, but I think it is a creative concept.

As for mirroring Warren Buffett’s moves, replicating his style may not be that simple.

Timing Issues

Berkshire Hathaway, Warren Buffett’s publicly traded investment company, does not pre-announce its plans. By the time an individual investor learns what Buffet has bought or sold, there may have already been a price shift as others have jumped into, or out of, the stock.

The smaller the company’s capitalization, the more impact the announcement will have on the share price.

Private Company Investments

Some Berkshire Hathaway investments are in private companies or investments that a small investor cannot access on his own.

From Berkshire’s September 30, 2009 Form 10-Q filing with the US Securities and Exchange Commission,

“On March 18, 2008, Berkshire acquired 60% of Marmon Holdings, Inc. (“Marmon”), a private company owned by trusts for the benefit of members of the Pritzker Family of Chicago, for $4.5 billion. In the second quarter of 2008, subsequent to this acquisition, Berkshire acquired additional shares of Marmon and currently owns 63.6%. Under the terms of the original purchase agreement, Berkshire will acquire the remaining interests in Marmon between 2011 and 2014 for consideration based on the future earnings of Marmon. Berkshire also acquired several other relatively small businesses during 2008. Consideration paid for all businesses acquired in the year ended December 31, 2008 (including Marmon) was approximately $6.1 billion.”

Active Business Income

A percentage of the returns experienced by Berkshire are derived from active business income, especially in the insurance sector.

From the September 30, 2009 Form 10-Q, nine month revenues from operating assets were $82 billion and net earnings from these entities were $8 billion. So there is more to the performance of Berkshire than simply interest, dividends, and capital gains.

Influence on an Investment’s Business Strategy

Berkshire often makes a large enough investment to allow them to have some influence with the invested company.

For example, at September 30, 2009, Berkshire held about $10 billion in Coca Cola stock and has been a long term investor in the company. Although no longer a Director, Warren Buffett sat on Coke’s Board of Directors from 1989 to 2006. Do you think Berkshire did not have some influence on the strategic direction of Coke?

The Buffett Premium

At times Berkshire trades at a premium due to the “Buffett Premium”. That is, there is value in having Warren Buffett making the decisions and that is reflected in the Berkshire share price and annual performance.

Mirror Berkshire

If you do want to try and mimic the Buffett investment strategy and cannot afford to invest directly in Berkshire itself, you do have a few options.

Tracking Services

Consider services such as Validea. Not the route I would go, but it might make sense for some readers.

Funds With Heavy Berkshire Holdings

Invest in mutual funds that maintain significant investments directly in Berkshire shares.

As at June 12, 2009, Sequoia Fund [SEQUX] has 30% of its assets invested in Berkshire and Fairholme Fund [FAIRX] has 14%.

Updated – as at March 7, 2012 Sequoia had fallen to 8.53% and Fairholme to 5.94%. Instead, consider funds such as Blue Chip Investor Fund (BCIFX) with 30.76%, Boulder Total Return (BTF) at 26.7%, or Denali Fund (DNY) at 21.61%.

Watch out for management fees, total fund performance, etc. You need to conduct proper due diligence before investing in any fund. I am not recommending these funds, only providing examples of funds with substantial exposure to Berkshire Hathaway shares.

Funds That Follow Warren Buffett’s Philosophy

Or consider funds that try to adhere to Buffett’s general investment style.

BBH Core Select (BBTEX) with 5.94% Berkshire holdings, Weitz Partners III Opportunity Fund (WPOPX) with 3.67%, and Ariel Focus (ARFFX) with 2.94%, spring to mind.

Note that the idea here is not to invest largely in Berkshire, but to closely follow the Buffett value investing style.

Again, these are examples not recommendations. I do not own any investments listed above.

Mirror Berkshire Yourself

Ignore the limitations discussed above and invest in the same public companies as Berkshire.

You will save on management fees and the Buffett premium, but may find the other issues create a significant performance variance from Berkshire results.

None of the above options will exactly match Berkshire’s results, but they might give a decent approximation. Good luck.

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