Warren Buffett, aka the Oracle of Omaha, is one of the most
respected investors of all time. The aura surrounding Buffett is
so large that investors are constantly trying to imitate his
Every three months traders get an insight into Buffett mindset
when he discloses which stocks he bought and sold during the
previous quarter for his investment company Berkshire Hathaway.
Many investors use these disclosures to set up their own
portfolios that are as closely aligned with Buffett's as
While I understand this train of thought, there are a couple
of major flaws with this investment strategy.
For one thing, the information does give a view into which
companies Buffett likes and dislikes, but by the time the trades
are disclosed a significant amount of time has already passed,
several months in some cases. A lot can happen in a few months,
and while the information is still valuable, the timeliness of
the information has lost some of its value.
Another problem is that even if you do buy a stock off
Buffett's recent acquisition list, you are doing so at the same
time as many other traders, and thus pay an inflated price that
is probably higher than Buffett likely did. And you are also not
going to be able to exit the position at the same time as he does
either. By the time you learn that Buffett has unloaded his
position, so has everyone else, and this information could result
in a selloff just as you're trying to act.
Another problem with trying to imitate Buffett is that there
is no way to ever have the same level of information that he has
at his disposal. For example, if you want information on a
company, you can try talking to your broker, or maybe getting in
touch with an analyst who covers the stock. Buffett, on the other
hand, can simply pick up his phone and have the CEO on the line.
That is not to insinuate that Buffett is able to use his power to
gain privileged information, but to just make the point that he
will always be more in the loop than the average investor.
Simply put, unlike Buffett, who is able to move before anyone
knows what he is up to, traders looking to duplicate his trades
are getting into the stock at the same time as everyone else, and
then selling the stock at the same time as the rest of the
This is not a recipe for success.
The good news is that Buffett tends to be a long-term
investor. His style is to buy stocks that can hang on to for
lifetime, and this is big reason as to why he has enjoyed so much
success through the years. He does his homework, and he ensures
that his investments will be strong by choosing only those
companies he believes in, and whose businesses he can understand.
This means that even if you do buy the stock at a higher price
than Buffett paid, since it is going to be a long term holding,
chances are that the difference will not be too material by the
time you unwind the trade, but there still remains a large chance
that you will pay more than Buffett, and sell for less.
I believe that there is a lot to gain by trying to imitate
Buffett's investing style, but I see too many problems with
simply trying to buy and sell the stocks that he is currently
trading. You are getting the buy information too late, you are
not privy to the same information while you are holding the
position, and you receive the sell signal after he has already
exited the position at the same time as everyone else.
Instead of following behind, a much better way to trade his
portfolio is through shares of his investment company, Berkshire
Hathaway Inc. (BRK.B). By trading BRK.B as opposed to individual
stocks, you know that you are getting in and out of the stocks at
the same time Buffett makes his move, so I believe it is the best
way to replicate his investments.
Using a hedged trade on BRK.B, we are able to trade like
Buffett, but at the same time boost our returns and lower our
risk. A nice hedged trade on BRKB would be the June 100/105 bull
put credit spread. In this trade, you would sell the June 105 put
while at the same time buying the same number of June 100 puts
for a credit of 30 cents. This trade has a target return of 6.4%,
which is 21.2% on an annualized basis (for comparison purposes
only). BRK.B is currently trading at 116.06, which gives the
trade 9.3% downside protection.