the past 36 years. For its consistency and profitability, this company,
managed by Warren E. Buffett of Omaha, has been amazing.
If you asked Buffett how you, as an individual investor, could go
about imitating his spectacularly successful investment strategy, his
answer would be: buy shares of Berkshire Hathaway. He happens to
be an unusually sensible person, and that is clearly the best answer.
But if you buy or intend to buy other stocks on your own, either
one-at-a-time or through a managed mutual fund, there is much that
you can learn by studying Buffett’s tactics.
Why not just do the obvious and put all your money into Berkshire
Hathaway stock? One reason: It’s mainly an insurance holding company—
Buffett is an authority on insurance. Because of this, the
stock has virtually no exposure to many areas of the stock market,
such as technology and health care. A second reason: Berkshire has
become so enormous that its future performance is handicapped,
much like the odds-on favorite in a horse race being forced to carry
extra weights.
In short, you might do better on your own. First, because you have
a smaller, more nimble portfolio. And, second, because you might
shoot out the lights by overweighting stocks in whatever field you’re
particularly knowledgeable about—health care, technology, banking,
whatever. Buffett refers to this as staying within your “circle of
competence.” (There’s nothing wrong, of course, with your also buying
Berkshire stock. I have. The Sequoia Fund, run by friends of Buffett’s,
has one-third of its assets in Berkshire.)
While the average investor can learn a thing or two from the master,
he or she simply cannot duplicate Buffett’s future or past investment
performance. One obvious reason: Buffett has the money to
buy entire companies outright, not just a small piece of a company.
He also buys preferred stocks, engages in arbitrage (when two companies
are merging, Buffett may buy the shares of one, sell the
shares of the other), and buys bonds and precious metals. He’s also
on the board of directors of a few companies Berkshire has invested
in. Perhaps the most difficult thing for individuals to duplicate is
Buffett’s small army of sophisticated investors around the country
who fall all over themselves to provide him with “scuttlebutt” about
any company he’s thinking of buying. Also, Buffett has the word out
to family-owned businesses: “I’ll buy your company and let you keep
running it” (another thing individuals can’t duplicate).
Let’s not forget, too, that Buffett also happens to be extraordinarily
bright, a whiz at math, and to have spent his life almost monomaniacally
studying businesses and balance sheets. What’s more, he
has learned from some of the most original and audacious investment
minds of our time, most notably Benjamin Graham.
Still, while it’s true that trying to emulate Pete Sampras or the
Williams sisters does not guarantee that you will wind up in Wimbledon,
you could very likely benefit from any of the pointers they
might give—or from studying what it is they do to win tennis
matches.
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. And
then he just hangs on.
There is, in fact, a whole library of books out there about Buffett
and his investment strategies. There are Berkshire web sites, Internet
discussion groups, and annual meetings that are beginning to resemble
revival meetings. There is also a Buffett “workbook” that
helps people invest like Warren Buffett. It even includes quizzes.
This book isn’t written for the Chartered Financial Analyst or the
sophisticated investor (readers familiar with Graham and Dodd’s Security
Analysis). It is for ordinary investors who know that they
could do a lot better if they knew a little more. And the truth is,
much of Buffett’s investment strategy is perfectly suited for the
everyday investor. His advice, which he has been generous in sharing,
is simple and almost surefire.
Buffett buys only what he considers to be almost sure things—
stocks of companies so powerful, so unassailable, that they will still
dominate their industries ten years hence. He confines his choices to
stocks in industries that he is thoroughly familiar with. He will seek
out every last bit of information he can get, whether it’s a company’s
return on equity or the fact that the CEO is a miser who takes after
Ebenezer Scrooge himself. He scrutinizes his occasional mistakes,
quickly undoes them, and tries to learn lessons from the experience.
While he is loyal to the management and employees of companies he
buys, he is first and foremost loyal to his investors. To Warren Buffett,
the foulest four-letter word is: r-i-s-k.
Beyond that, he avoids making the 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.
In short, as Buffett has modestly confessed, the essential reason
for his success is that he has invested very sensibly and very rationally.
Another way of putting it: Buffet invests as if his life depended on it.
A word of warning: Not all of Buffett’s strategies should necessarily
be imitated by the general investing public, in particular Buffett’s
penchant for buying only a relatively few stocks. A concentrated
portfolio, in lesser hands, can be a time bomb.
There are some things that geniuses can (and should) do that
lesser mortals should be wary of; there’s a law for the lion and a law
for the lamb. Ted Williams, the great baseball slugger, never tried to
bunt his way onto first base, even during the days of the “Williams
Shift,” when players on the opposing team moved far over to the
right side of the field to catch balls that Williams normally whacked
down that way. He wasn’t being paid to bunt toward third base and
wind up with a mere single, much the way Warren Buffett isn’t expected
to do just okay. But you and I, not being quite in the same
class as those two, should be perfectly content with getting on base
consistently using such unimpressive techniques as bunt singles.
No doubt, overdiversification—owning a truckload of different se-
curities—is something that gifted investors should steer clear of. But
underdiversification, owning just a few securities, is something that
ungifted investors (in whose ranks I happily serve) should also avoid
like the plague.
In 1996 there appeared a short, charming book with a cute title:
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). The author is a Certified Financial
Planner, Luki Vail.
The text talks about the blessings of an investor’s owning a diversified
portfolio, not a concentrated portfolio. Writes the author, “Diversification
of your investment dollars along with appropriate time
strategies are your best tactics to protect you against such things as
stock market crashes.” (“Time strategies” means suiting your portfolio
to your needs. If you think you’ll need your money in fewer than
five years, go easy on stocks.)
Why buy mutual funds? “Here is your chance to own stocks in 50
to 75 companies.”
“Generally, stay away from individual stocks until you have about
$250,000 to invest; then you can have a well-diversified portfolio, like
your own personal mutual fund. That way when a stock takes a nose
dive on you, it will only have a small position in a very large portfolio,
and you will take only a small loss, which could possibly be offset
by the gain of some other stock.”
In brief, 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.
I might offer a compromise suggestion: The ordinary investor, the
lesser investor, might have a core portfolio of large-company index
funds composing 50 percent or more of the entire stock portfolio.
(Buffett has recommended that tactic for most investors.) And outside
the core portfolio, the lesser investor might swing for the seats
by imitating the strategy of the man generally acknowledged to be
the greatest investor of our time.
Warren Boroson
Glen Rock, N.J.
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