The renowned investor Warren Buffett has enjoyed cult status for decades. When the "Oracle of Omaha" buys into or sells out of something, it moves prices. But is it really a good idea to follow him?
The stock of the troubled US health insurer UnitedHealth has been through quite a slump. But when it became known in August that US investor Warren Buffett had bought a hefty block of shares through his holding company Berkshire Hathaway, the price headed north again. After all, Buffett is said to have a "golden touch" — and to spot opportunities that others overlook.
A scene from his childhood seems to embody this reputation: when he was still too young to bet on horses himself, he would search the floor of his local racetrack, among the sawdust and cigarette butts, for discarded betting slips. Some people simply didn't know that, under certain circumstances, these could still yield a small win even if the favored horse didn't cross the finish line first. So even as a very young boy, Buffett was hunting for undervalued assets. That would later make him famous.
On the trail of intrinsic value
After graduating from the University of Nebraska in 1949, Buffett studied economics at Columbia Business School. It was there that Benjamin Graham taught. Together with David Dodd, Graham had developed strategies for "value investing." The strategy is about determining a company's intrinsic worth. There are various methods for doing so. The goal is always to find stocks that trade far below their "intrinsic value" — in the hope that the market value will eventually catch up to it.
In 1956, Buffett founded his first own investment firm. Six years later, he acquired shares in the struggling textile company Berkshire Hathaway. And he later used that name for his own investment company. Today it is a sprawling conglomerate with numerous holdings and a market value of over one trillion US dollars.
Buffett has been making headlines with his investments for many decades now. It helps that he often buys into companies with well-known brands. Among his most successful investments is Apple — although he only began building a position in 2016. By then, Apple had long since risen to become the most significant company in the world by market capitalization. Buffett has since parted with a substantial portion of his Apple shares. Even so, in the second quarter the stock still carried the highest weighting among the roughly 40 listed companies in the Berkshire portfolio.
Follow the legend?
Berkshire Hathaway's moves can be tracked via quarterly reports that institutional investors are required to file with the US Securities and Exchange Commission (SEC). These so-called 13F filings are published with a delay, however — up to 45 days after the end of the quarter. So they don't necessarily reflect the current portfolio at any given time.
But that isn't the decisive reason why you shouldn't simply buy the stocks that Buffett invests in. "The decisive factor is the high risk. Because of course it's not the case that Buffett is never wrong," emphasizes Philipp Dobbert, Head of Asset Management at quirion and Quirin Privatbank. Buffett himself repeatedly admits this publicly. The acquisition of the metal-processing company Precision Castparts, for instance, turned out to be a billion-dollar flop. He later described his stakes in the retailer Tesco and in Dexter Shoes as "huge mistakes" as well. No one has the much-invoked crystal ball that reveals the future winners. Not even Buffett.
What about the idea of not just copying individual investment ideas, but instead bringing all of his investment ideas into your portfolio via the Berkshire stock? "That would be comparable to investing your money in a highly concentrated active fund," Dobbert explains. "It's somewhat less risky than putting money into individual stocks on your own. But still very speculative." Even if Berkshire Hathaway can point to many successes: "The decisive question is how long the success will last." A "lucky touch," at any rate, can't be systematically projected into the future.
Buffett turned 95 this year. At the end of the year, he plans to step down as CEO. He will, however, remain connected to the company. By his own account, he doesn't want to sell a single Berkshire share, because he believes in the company's future. He's a self-declared long-term investor anyway. Among the frequently cited Buffett quotes is the saying: "If you aren't willing to own a stock for ten years, don't even think about owning it for ten minutes."
Thinking long-term
Investment strategist Dobbert can certainly appreciate this quote. "Smart investing is geared toward the long term; it doesn't jump from trend to trend." But years of capital market research have shown: anyone who tries to beat the market through selective stock picking usually ends up with lower returns than would have been possible on the market. That's why investors would do better to steer clear of forecasts and speculation. "Far too many people take on too much risk. That's not at all necessary in order to take advantage of the return opportunities of the stock markets."
Stocks are productive capital. They give you a stake in companies and thus in the economy. While individual companies can fail, and individual industries and countries can fall into long crises, "the global economy as a whole is geared toward growth," Dobbert points out. That is the foundation for rising prices over the long term. "With a world portfolio like quirion's global ETF portfolio, you put that to work for your own investment goals — and take on no unnecessary risks."
In doing so, the global ETF portfolio takes a total of five return factors into account. One of them is the "value factor." So the portfolio also includes stocks whose intrinsic worth lies below their market value. Unlike Buffett's "value investing," however, the aim in this case isn't to outperform the market return. "Our goal is to track the long-term average return of the global stock market as closely as possible," Dobbert explains. "Because, according to scientific findings, this strategy offers the best balance of return opportunities and risks."
Why you shouldn't invest in products, but in your goals.
