7 Reasons You Shouldn't Invest Like Warren Buffett

By Tim Lemke on 22 September 2016 0 comments

Warren Buffett is, by most accounts, one of the most successful investors in history. The CEO of Berkshire Hathaway has amassed billions of dollars (more than $65 billion, at last count) through his savvy understanding of corporations' performance and the stock market.

But investing like Warren Buffett isn't easy, and an examination of Berkshire's holdings indicates that average investors might not necessarily benefit by following his every move.

Here's a look at some reasons to avoid investing like Warren Buffett.

1. Because You Can't

We can all try to invest like Warren Buffett, but at a certain point it will be clear that he can do things that us mere mortals can't. Buffett has access to information that most people wish they had. He's super wealthy, so he can buy shares in much larger quantities and take risks that we simply can't. He has mountains of cash, and the reputation to cut deals that we can't make. He has access to different types of investments (preferred stock, venture capital) that are often unavailable to non-wealthy people. It's possible to follow his general approach to investing, but at a certain point it's nearly impossible to do what he does.

2. His Goals Aren't the Same as Yours

The average person should be investing with long-term growth in mind, focused primarily on building a large retirement fund. An older investor might invest for income through dividend stocks and bonds. Berkshire Hathaway's investment motives, however, are far more complex. While it is focused on building wealth over the long-term, it also makes decisions to please its shareholders in the short-term. It makes acquisitions that don't make sense immediately, but have a broader strategic value.

3. He's Not Very Diversified

Berkshire Hathaway is a large and sprawling company with investments in a wide range of industries. But most of the company's holdings are still comprised of a handful of companies. More than half of the company's value is tied up in its stakes of Kraft, Coca-Cola, Wells Fargo, and IBM. Nearly 40% of Berkshire's portfolio stems from the consumer staples sector, while another 30% is tied up in financials. Meanwhile, the company has relatively small investments in major sectors including health care, energy, or telecommunications.

4. He Sometimes Invests With His Heart, Not His Head

Yes, even Warren Buffett is known to invest with his heart rather than his head. Not all of his investments are unemotional and purely driven by cold facts. Consider his affection for Coca-Cola. (He's known to drink several Cokes a day.) While it's true that Coca-Cola is one of the stock market's great success stories, it's actually underperformed the broader stock market over the last five years. Despite this, Buffett's Berkshire Hathaway has about 400 million shares of Coca-Cola, or 9% of the company.

5. He's Missed Out on Technology

When tech took off in the 1990s, Warren Buffett was not on board. No big investments in Microsoft, Apple, or Cisco. And he's also declined to invest in recent tech success stories including Alphabet (neé Google), Amazon, Netflix, or Facebook. He is a big investor in IBM, but bought shares late in the game and the company has had several years in a row of declining revenues.

Buffett has said he hasn't invested in tech because he doesn't understand it. While it's wise to avoid investing in something you don't understand, it also means he's missed out on some big gains over the years.

6. You're Better Off With Mutual Funds and ETFs

Warren Buffett is a great stock picker. His Berkshire Hathaway is a sprawling firm with investments in a wide range of companies in various industries. But for most people, it's foolish to try to invest in individual companies and expect to beat the broader stock market. It takes a lot of work to assemble a well-balanced portfolio if you're buying individual stocks. Mutual funds and exchange-traded funds offer the ability to invest in the broader stock market without worrying about share prices of individual companies.

7. He's Too U.S.-Centric

There's nothing wrong with betting on America and its companies. But a well-diversified portfolio should also have a good amount of international exposure, and Warren Buffett has tended to invest heavily in U.S.-based companies while ignoring the potential growth from overseas firms.

The suggested amount of exposure to international and emerging market stocks varies depending on the investor's age and goals. But Morningstar's Lifetime Allocation Indexes are one possible guide. These indexes, which offer a mix of investments appropriately balanced for a person's retirement age, have between 10% and 40% invested in non-U. S. stocks. Morningstar suggests holding more international stocks the further you are from retirement.

Warren Buffett hasn't eschewed international investing entirely, as Berkshire Hathaway does have holdings in European insurance companies and recently bought a German motorcycle accessory manufacturer. And some Berkshire holdings, including Coca-Cola and IBM, do have a significant overseas presence. But many of Berkshire's top holdings, including U.S. Bancorp, Wells Fargo, and Charter Communications, offer very little international exposure.

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