Why You Should Not Blindly Copy Warren Buffett
Don’t get me wrong. I love Buffett!
A couple of years back, I met with a friend who had some success in investing and he was thinking of ways to improve his investing strategy. He came up with a seemingly brilliant idea.
“Since Warren Buffett is lauded as one of the best investors of all time, maybe I should copy his trades? Especially when all his investment holdings are available online. This should be easy!”
During that time, I was just starting out on investing, and I was none the wiser so I kept quiet about it. In fact, I was tempted by his idea and decided to look into it. However, it became apparent that while Warren Buffett’s portfolio is readily available online, it wasn’t as straightforward as it seemed.
Indeed, all US fund managers who controls investments of at least $100 million, are required to submitted their investment filings quarterly.
Therefore, normal investors like us can literally “copy” the trades of these superstar investors such as Warren Buffett. However, there are some limitations and I will highlight the important ones here.
There Will Always Be A Time Lag
While you can follow the superstar investors’ trades quarterly, it will not be a perfect mirror. This is because they are allowed to delay their filing up to 45 days after the end of quarter date. That means there will always be a time lag between when these investors trades and when you become aware of their trades. Hence you will always be late to the party; both to buy when the prices are rising and to sell when the prices are falling. In more time sensitive scenario, you might even be buying a stock that the superstar investor, whom you are copying ,is already selling within that 45 days. (I must clarify that Warren Buffett is not known to trade so frequently though)
Unable to Reach the Same Level of Diversification
Usually, these superstar investors have a much more diversified portfolio than normal investors. Hence, you will be less diversified when you only copy some of their trades. Even if you can copy their entire portfolio diversification, the cost of buying and selling so many stocks alone will cost you a bomb.
Not Understanding Their Investment Motive
While these superstar investors have to disclose what they sell or buy, they almost never share the investment motive behind their trades. It may include factors such as their expected time horizon, asset allocation, insider information, and other motives. In short, you will never truly understand why they sell or buy a particular stock. For example
- When they buy a particular high risk stock, they may have hedged it secretly in other ways to lower their risk. And if you copied blindly, you will be facing a lot of losses when it tanked.
- They could be buying a lot of shares of particular company because they want to privatize it, and if the company is privatized at a price below your buy price, you will be at the losing end even when the superstar investor gains from owning a profitable company in the long run.
But All is Not Grim
There are still a lot of things you can learn from superstar investors. I will share one that I often learned from superstar investors such as Warren Buffett.
Potential Stocks for Watchlist
While their motive of owning a stock may be different from yours, their trades could provide ideas for potential stock in your watchlist. By monitoring what they are buying and selling, you can conduct your own research on these stocks and determine if they are suitable for your portfolio. I always use Whalewisdom to check on my favourite superstar investors’ trades. While I don’t copy them blindly, their trades provided a lot of ideas for my watchlist and some eventually made it to my portfolio too.
In conclusion, while copying your favourite superstar investors may sound like a brilliant idea, we must have the self-awareness to recognise that we are not able to duplicate their success. They are backed by many researchers and analysts which give them an edge over us, no matter how hard we try. (Unless you wake up one day and see Warren Buffett staring right back at you in the mirror)
As the saying goes, “We all stand on the shoulders of giants”. While we are not YET superstar investors, we can still take advantage of their trades to further enhance our investment decisions.
In the next post, I will talk about other than standing on the shoulders of giants, why we should not fight on the same playing field as them.
See you next week!
Investing Always,
Pete
