One easy way to profit like Warren Buffet's


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Michael Fowlkes 03/10/2014

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 investment style.

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 possible.

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 market.

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.

Chart courtesy of

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.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Originally published on

This article appears in: Investing , Options

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