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Investing Like Buffett - What’s it Like to Invest Like Buffett

Originally published in 2006, investing like Buffett BRK has fared better over the last 3 years, as in the 3 years 2006-2008 BRK was up about 8% total (still a little worse than a money market fund) the S&P 500 did a lot worse, losing about 29% in that same period of time.

One of the most common pieces of investment advice is to find a good investment and to simply hold on to it. Known sometimes as buy and hold investing, it doesn’t seem to be working as well as it once did. A common response of buy and hold advocates is to point to the success of some of the famous value investors. The most famous of the contemporary value investor is Warren Buffett.

Given that, it’s fair to as how Warren Buffett investments been performing recently. Everyone knows that he’s had investment returns of over 20% per year since he started investing, even better depending on which period of time you review. Most of us would be quite happy getting those returns.

Now Warren Buffett does have a few advantages over the average investor. He doesn’t just invest in stocks, he invests in companies. His practice is to buy a large stake in a company, and he then gets to name the CEO of the company, and gets to choose one or more board members. Most of us average investors don’t need to worry about choosing who runs as board members or who would make a good CEO.

Now with all those advantages, it’s fair to ask how well he’s done in the past several years. A lot of Buffett’s reputation is based on history stretching back to the early days of Berkshire Hathaway in the 1960’s. How has the “Oracle of Omaha” and his buy and hold approach done in the past several years?

The holding company for the collection of companies that he owns is Bershire Hathaway. So we can easily judge his performance by looking at the stock price. The Class A shares have recently become infamous for being one of the most expensive stocks on earth (trading recently at over $100,000 a share).

To accommodate more “average investors” several years back they introduced the Class B shares, trading recently over $3000 a share. So, you if you want to invest like Warren Buffett, taking advantage of his inside connections, you can simply buy the BRK Class B shares.

Let’s take a look at their performance. After the Class B shares started trading, they initially went up just like you would expect from a work class investor averaging over 40% a year in 1997 and 1998.

But, after that the performance has not been as good:

1999 down 22.1%
2000 up 28.6%
2001 up 7.3%
2002 down 4.0%
2003 up 16.2%
2004 up 4.3%
2005 up 0.0%

For the 7 years from 1999 to 2005, HRK.B has increased 41%, which is a compounded annual growth of about 5%, slightly better than a money market fund. Recall that as meager as that looks, it did outperform the S&P 500 over that same time period, so he did beat the index fund holders.

If that’s not the world class performance you were looking for, or if it just reminds you of your own results, what alternatives do you have?

The top ranked advisory services in Hulbert Financial Digest over the last several years have many newsletters that use a relative strength or sector rotation approach to investing, specifically using mutual funds. Choosing the top mutual funds and rotating sectors on a regular basis has been a successful approach for many years. However, as mutual funds add Early Redemption Fees (ERF’s) to limit fund switching that approach has become much more difficult, as it eliminates many top rated funds from use in a sector rotation strategy.

There are a couple of ways to get around these fund limitations:

1) The Fidelity Select Mutual Fund family still allows trading after a holding period of 31 days, and has over 40 funds which offers the diversity to effectively implement a sector rotation strategy. Many newsletters have a long history successfully trading the Fidelity Select Funds. Also, most of the other Fidelity mutual funds still have no redemption fee if they are held for at least 90 days.

2) Exchange Traded Funds (ETFs) have a large diversity of offerings, and can be traded at any time, since they are bought and sold just like stocks (although you do have to pay the same commission as a stock trade). While exchange traded funds don’t have as long a history as the Fidelity mutual funds, so there is not as much trading history on systems using ETF’s, many successful investment newsletters are starting to offer portfolios using ETF’s instead of sector mutual funds, with similar performance advantages.

Filed under Buy and Hold Investing, Published Articles

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