First, let’s be clear why you would want to trade like Warren Buffett. In a word: Success. Warren and the other ‘Huskers in Omaha manage Berkshire Hathaway
Corporation. Between 1965 and 2013, Berkshire Hathaway has had an overall gain of 693,518%, outperforming the S&P 500 by more than a factor of 70.
Arguably, one of the most successful traders in history.
Earlier this week, Business Insider published an article about how Warren shared the secret to his success 30 years ago.
(http://www.businessinsider.com/warren-buffett-graham-and-doddsville-lecture-2014-8#ixzz3AxxoEnzh) He also predicted that no one would listen.
The secret is simple: buy companies that are worth more than their current trading price.
There you go. Easy Peasy. So, why don’t people follow it? Two reasons:
- People are lazy
- People are impatient
Finding the value of a company is work. It is not much work, but it takes some effort. Financial data are available for free on the interweb.
(http://bit.ly/1mn3K7H.) However, some people are just plain lazy.
The other reason people do not piggyback on Warren Buffett is they lack patience. I recall watching Mad Money around 2008. Jim Cramer was talking about
Warren adding USG to his portfolio. How could both Cramer and Buffett be wrong? I jumped on the stock. (How does it go? “BUY! BUY! BUY!”)
After I had bought it, USG stock was anemic and traded sideways for about three years. USG is much higher today. However, personally, I bailed on it long
ago. I was impatient.
I recall reading an interview where Warren talked about looking at 20 year timeline when he made his investments. The man defines patience.
Today, I have a greater appreciation for Warren Buffett and the importance of fundamentals. I also am more patient and have learned to master the collar
trade, where I can use options to protect my assets and generate income – even in a sideways or down market.
So, do you want to be more like Warren? Here are three ways you can trade like the Oracle of Omaha.
- Valuate Companies Like Warren
The method of the Maven is well documented. Warren Buffett is a student of Benjamin Graham, a.k.a., The Dean of Wall Street or the Einstein of Money.
Graham pioneered the simple concept of a company’s intrinsic value. It is a straightforward method that considers the earnings per share (EPS), the
long-term growth rate, and the current bond yield. Push some buttons on the calculator, and you got your valuation. If the valuation is less than the
current stock price, the company is undervalued. There’s more to the method than that. Warren also considers the return on equity (ROE), debt to equity
ratio, rising and falling profit margins, how long have the company has been publicly traded and is the company differentiated, i.e., the product is not
just a commodity.
I cannot do the method justice in one paragraph. However, there are plenty of places where you can find the Buffett method. Visit the library or google it.
- Cheat – “Mind if I copy your homework?”
Berkshire Hathaway is required by law to file a 13F, which discloses the equities owned and any changes since last quarter. They have done the homework for
you! You can just copy off the big man.
The second quarter 2014 13F report just released and had some interesting nuggets.
- Core Holdings: The top holding in Berkshire Hathaway are not a surprise. Wells Fargo (WFC), Coke (KO), American Express (AXP), and IBM (IBM) are the top four holdings and make up 64% of the portfolio valuation. All of these are top notch blue chips that would look good in any portfolio.
- New Positions: This quarter, the company added two new equities: Charter Communications (CHTR) and US Bancorp (USB). The Charter Communications position is rather small at just 0.34% of the portfolio. However, the US Bancorp position is notable because it comes in at number 9 overall and represents 3.23% of the portfolio. Mr. Buffett is bullish on USB.
- Increased Positions: Other notable changes were sizable increases in Verizon (VZ), Liberty Global (LBTYA), and Sun Energy (SU)
- Dumped: And he does not seem to like STARZ (STRZA) since he closed that position last quarter.
- Buy Berkshire Hathaway
The simplest and easiest way to trade like Warren is to buy Berkshire Hathaway stock. The legendary Berkshire Hathaway A (BRK.A) common shares were selling for $202,388.00 per share at the time of this writing. 20 years ago they were merely $18,200.00. Fortunately, for retail traders, the Berkshire Hathaway B shares had a 50-to-1 split in January 2010 and are now obtainable by mortals. The BRK.B was trading at $134.91.
Buying the stock also gives exposure to the investments that are not publically traded but held by Berkshire, e.g., Benjamin Moore, BNSF, CORT Business Services, Fruit of the Loom, GEICO, Heinz, Helzberg Diamonds, Dairy Queen, Lubrizol, NetJets, Pampered Chef, and See’s Candies.
Whichever method you chose, you can be like more Warren. The key is to have the discipline to do the work and have the patience to develop and follow a