Don’t Follow Buffett, Here’s Why

The decision to follow a billionaire investor makes intuitive sense. The logic goes something like this: A billionaire only became rich by making a series of decisions that grew their wealth, if I follow their next decisions, I can be rich too. It seems rationale but it can be hazardous to your portfolio.

Take Warren Buffett, for example, and his most recent faux-pas where he lost a lot of Berkshire Hathaway capital betting on Paramount. He confessed to his followers at the most recent annual conference in Omaha that the decision was all is, and the losses should be blamed on him alone.

That’s no solace to any investor who followed in his footsteps, tempted by the high yield and thinking Warren had an edge that they didn’t see. Instead it turned out to be a value trap that punished him and those who followed him into the position.

So what’s a better path to riches?

Key Points

• Mimicking billionaire investors like Warren Buffett can lead to significant portfolio risks, as even seasoned investors make costly errors, evident from Buffett’s investments in Paramount and IBM.
• Despite extensive experience, Buffett has had notable investment failures that highlight the unpredictability and inherent risks of the stock market.
• Instead of copying individual stock picks, investing in the entirety of Berkshire Hathaway’s diversified portfolio offers a more secure strategy.

The Buffett Flops

The Paramount flop wasn’t the only one that led Buffett’s followers into portfolio quicksand in recent years. He famously got it wrong with IBM too, before pivoting to Apple.

So too did Buffett take an absolute bath on Occidental Petroleum, at least on paper, for a very long time period before it finally turned around.

Notably, some of his investments led to lower share prices that he sold and lost money on while others led to him holding only for them to go higher. IBM and Paramount fall into the former category and Occidental Petroleum into the latter.

What’s interesting about these examples is that it shows that, after over half a century of investing, Buffett is still highly susceptible to making poor investment decisions. In spite of all his filters, Buffett still lets a few flops get past him.

As ordinary investors, it’s hard to know of when it makes sense to follow Buffett. Certainly the risks of following any single position are high, so what’s a better way?

How To Make Much More Money

Instead of copying Buffett’s moves, a much smarter play would seem to be to actually do what Buffett does, meaning hold the entire Berkshire portfolio. The reality is that as Buffett falls short on any single stock, his basket of equities and companies more than offsets those losses. So by owning Berkshire Hathaway you get to ride on his coattails without taking on single stock risk.

Better yet, unlike an exchange-traded fund, Buffett has figured out how to own a diverse group of positions across sectors without charging an expense ratio. So instead of your holdings getting eroded slowly over time by fees, you get to own a collection of wide moat companies with no carrying cost.

The long and the short of it is it’s better to simply own all of Berkshire’s holdings than any single one if you want to limit downside portfolio risk because if even the Oracle of Omaha can pick losers regularly, what are the odds the ordinary retail investors will escape  such a fate?