Investors who think they can match Warren Buffett's returns by following him into the stocks he buys are fooling themselves — they can't really invest like him and should not even try, according to an analysis by Forbes contributor Adam Hartung
Hartung, a managing partner of Sparks Partners, notes that shares of Buffett's investment vehicle, the conglomerate Berkshire Hathaway, have risen 149 percent in the past 10 years or so — more than double the returns of the benchmark Dow Jones Industrials or S&P 500 averages.
Still, it would still be a poor decision to buy the stocks that Berkshire owns.
"Berkshire Hathaway's value has little to do with the publicly traded equities it owns. In fact, those holdings may well be a damper on BRK's valuation," Hartung asserts.
In fact, the four core holdings that make up 58 percent of Berkshire's holdings — American Express, Coca Cola, Wells Fargo and IBM — have not risen nearly as much as Berkshire itself has.
And even if you add in some of Berkshire's other large positions like the blue chips General Electric, Procter & Gamble and ExxonMobiil, Hartung says there is no mathematical way to come up with returns that are very close to those of Berkshire itself.
"Mr. Buffett is NOT a mutual fund manager," Hartung writes."Simply put, Berkshire Hathaway makes money by doing things that no individual investor could ever accomplish.
"The cash flow is so enormous that Mr. Buffett is able to make deals that are not available to you, me or any other investor with less than $1 billion (or more likely $10 billion)."
As an example, Hartung noted that when Buffett stepped up to buy $6 billion in GE stock during the 2008 financial meltdown, he was also able to extract terms letting him acquire $3 billion in GE preferred shares with a guaranteed dividend of 10 percent, and warrants to buy up to $3 billion of GE shares for a fixed price of $22.25 in the future, regardless of whether the stock had moved higher later on.
"These 'sweeteners' are not available to us average, ordinary investors. And this is critical to understand. Because if someone thought that Mr. Buffett made so much money by being a good stock picker, that someone would be operating on the wrong assumption. Mr. Buffett is a very good deal maker who gets a lot more when making his investments than we get."
Doug Kass, managing partner of Seabreeze Partners, who said he was short Berkshire Hathway more than a year ago, is still betting against the shares, he tells Yahoo
"Recent earnings reports at Coca-Cola and IBM, two large Berkshire Hathaway investments totaling almost $30 billion, suggest that the companies' moats appear to be vanishing," Kass explains.
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