Without question, Warren Buffett is the greatest long-term investor of the modern era, if not of all time. Since taking over a struggling textile company called Berkshire Hathaway (BRK.A 1.66%) (BRK.B 1.71%) in 1964, Buffett has produced a staggering 2,744,062% return for shareholders who got in at the beginning. And he has provided investors with some excellent advice along the way.
That said, it's not the best idea to try to invest exactly like Warren Buffett in your own portfolio. And here are three reasons why.
1. Your risk tolerance and goals are different than Buffett's
You aren't Warren Buffett. Warren Buffett is a 90-year-old man with a net worth of more than $80 billion who manages a stock portfolio worth well in excess of $200 billion. I can't speak with 100% certainty, but I imagine those three characteristics don't exactly apply to you. For example, I'm a 38-year-old with two young children, and my portfolio size isn't even in the same league as his.
The point is that every investor is different. An investment in the stock of Bank of America (BAC 1.09%) might have fit with Buffett's return objectives and risk tolerance, but it might not be a great choice for you. So, while there are certainly some great lessons to learn from Buffett's investment style and various teachings over the years, it's important to analyze your own investment needs before following him into a stock purchase or trying to replicate Berkshire's stock portfolio with your own.
2. It's not possible for you to make some of the investments Buffett has
As a billionaire investor, Warren Buffett has access to opportunities that you don't. Berkshire's original Bank of America investment comes to mind. If you aren't familiar, Buffett bought $5 billion of the bank's preferred stock with a 6% dividend and received free warrants to purchase 700 million shares at the then-current stock price if he wanted to. You or I could not have made the same investment, plain and simple.
Buffett also has the power to buy entire companies, or to buy enough stock so he has a controlling influence. Most people reading this couldn't buy a major energy company, for example, but he can (and has) done exactly that with the capital at his disposal.
3. Smaller investors actually have an advantage over Buffett
Now let's get to a positive note. Compared to Buffett, you're a small investor (unless someone like Jeff Bezos or Elon Musk is reading this). And smaller investors actually have some key advantages over big fish like Buffett.
In fact, he has told Berkshire's investors not to expect the same type of returns the company has produced over the past 55 years with him at the helm. Why? Because Berkshire has become too big to multiply its market value every few years. Simply put, while doubling an investment portfolio isn't easy, it's far easier to double $500,000 than $500 billion.
For example, let's say that a company goes public with a market value of $1 billion. Buffett rarely buys more than 10% of a public company's stock, so let's say that Berkshire invests $100 million. This is about 0.02% of Berkshire's market capitalization. Even if the stock proceeded to triple, it would barely move the needle for Berkshire. On the other hand, smaller investors can pursue small-cap growth opportunities and actually make a difference in their portfolio.
You can invest like Buffett without doing any work
As a final thought, even after reading this, if you still want to replicate Buffett's investment strategy, you can do so by simply buying shares of Berkshire Hathaway. You don't need to try to follow him into every stock investment he makes -- by investing in Berkshire, you can benefit from the success of his investment strategy, and with no heavy lifting on your behalf.
Or, you can do what I (and millions of investors) do. Own some shares of Berkshire Hathaway because you still believe in Buffett's ability to beat the market over the long run, but use the rest of your investment capital to construct a stock portfolio that works for you.