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Can you invest like Warren Buffett?

Maike Currie
Written By:
Maike Currie

Maike Currie of Fidelity Personal Investing wonders whether DIY investors can really become akin to the Sage of Omaha.

If I had a penny for every investment article that I have read telling investors how they can be the next Warren Buffett, pick stocks like Buffett, grow wealthy like Buffett, I would probably be very wealthy myself.

The best example of Buffett-worship is the excitement that surrounds the publication of the chairman’s annual letter to shareholders of Berkshire Hathaway, which is trawled over by eager investors each year for nuggets of wisdom from the Sage of Omaha.

Much was made of the most recent letter in which Buffett advocated the merits of tracker funds – advising his wife to put 90% of the cash he bequeaths her in his will into a low-cost S&P 500 tracker fund.

But can you really become Buffett? Cullen Roche, author of Pragmatic Capitalism – What every investor needs to know about money and finance, thinks not. In fact, he believes the myth of Warren Buffett is one of the greatest misconceptions in the financial world.

Buffett, he points out, is not a “folksy, frugal, regular old guy with a knack for picking stocks” but rather an exceedingly sophisticated businessman.
Roche explains that Buffett formed one of the original hedge funds in 1956 – Buffett Partnership Ltd., charging fees similar to those he now condemns in active funds. And the fee was hardly small change – 25% performance fees on top of 6% gains in the fund.

Like most very wealthy people, Buffett created his wealth by creating his own company. Roche describes Berkshire as the world’s “largest option-writing house” with the premiums and cash flow from Buffett’s insurance businesses used to create dividends that he could invest in other businesses.

Berkshire, says Roche, uses sophisticated insurance underwriting, complex fixed-income strategies, multi-strategy equity approaches and tactics.

Replicating this won’t just be difficult; for most private investors it will be nigh on impossible.

Roche concludes that sitting on the throne of the ‘world’s richest person’ was largely down to Buffett being a very astute businessman.
While illuminating, Roche’s research into Buffett fails to mention the investors who have followed Buffett’s mantra and done well. One example is Nick Train, who spoke to my colleague Tom Stevenson earlier this week. Train manages the CF Lindsell Train UK Equity Fund, a recent addition to our Select List of funds which our fund experts believe stand out from their peers.

A self-confessed Buffett disciple, Train follows Buffett’s approach of buying companies he considers to be great businesses with good management for less than they are intrinsically worth, and then holding them for the long-term. Judging by the performance[1] of the CF Lindsell Train UK Equity Fund, this approach has served Train well.

Perhaps the fairest assessment is this: You probably won’t be the next Warren Buffett but you can always become a better investor. As we have pointed out before, investment isn’t rocket science. By following a few golden rules of investing such as investing regularly, maintaining a diversified portfolio, investing for the long term and making use of the merits of compound interest, your investments can grow and with it your wealth.

You can also become a better investor by learning from the greats. While he might be a shrewd businessman and good investor in equal measures, there are many lessons to be learnt from Buffett.

And what is the Sage of Omaha doing now? Sitting on a lot of cash – according to Bloomberg, Berkshire’s cash has surged past the $50 billion mark – the highest since Buffett became chairman and chief executive officer of Berkshire Hathaway more than four decades ago. It now has more cash located in the US than Apple – America’s biggest company.

This could mean many things. As a start, it puts Buffett in a very strong position to make another big deal. It could be that he is not finding any enticing opportunities at a reasonable price as the US market has raced away and he is sitting tight. It could be a precautionary measure to make sure his company is well positioned to cope in an uncertain environment. Or it could be all of the above – only time will tell.

Calendar year performance (per cent)  2009  2010  2011  2012  2013 
CF Lindsell Train UK Equity Fund   34.9 30.0  1.1  21.4  35.3 
FTSE All Share   30.1 14.5  -3.5  12.3  20.8 

Source: Morningstar and FTSE International, total returns net of fees and expenses of Accumulator Class share

Past Performance (in percentages) is presented in British Sterling (GBP). Fund returns are calculated on a Nav to Nav or Bid to Bid basis with income reinvested either after tax (for UK-domiciled funds) or gross of tax (for offshore funds). Performance figures include the effect of the OCF/TER but exclude the effect of any initial charge and other fees charged in addition to the OCF/TER, such as those levied by the Fidelity FundsNetwork or Advisers. These figures relate to the fund’s past performance, which is not a reliable indicator of future results.

Maike Currie is news and investment content editor at Fidelity Worldwide Investment.