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3 Reasons You Shouldn't Invest Like Billionaires Do

By James Brumley - Mar 20, 2021 at 7:45AM

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Stock picking should be done with a personally specific goal in mind, and with a plan tailor-made to meet it.

The logic makes enough sense on the surface. Billionaires are super-rich for a reason. If you do what they do, you just might become super-rich too.

Investors looking to ride the coattails of the world's financial elite, however, might want to think twice about mirroring all their moves. Poaching their stock picks might not work given your unique situation, and worse than that may actually cause your portfolio to not live up to its full potential. Here are three reasons you may be better off doing your own thing.

Old billionaire smoking a cigar while counting a stock of $100 bills.

Image source: Getty Images.

1. Billionaires can live on interest and dividend payments alone

How much do you need to live on in any given year? The average worker in the United States takes home about $1,000 per week, according to data from the Bureau of Labor Statistics, or roughly $50,000 per year. Certainly, we'd all like to take home a little more than whatever we're earning now, but most people with that amount of income work before and during retirement.

Of course, most of us have to save a portion of our income and invest it for retirement if we want to maintain our standard of living in our golden years. We must also invest carefully to ensure we remain on track. That means maintaining a smartly balanced portfolio at all times to defend against the unexpected.

Billionaires don't have the nagging problem of deciding whether to live in the present or prepare for the future. They can do both without sacrificing either. Assuming the S&P 500's current dividend yield of only 1.5%, a billion-dollar investment in the broader market generates an incredible $15 million worth of income every year. That's not only more than comfortable, but that stream of income means the super-rich can afford to stick with a dividend-paying stock even when it's struggling. You may not have such a choice.

2. They already have a nest egg

In the same vein, billionaires don't have to build a nest egg. They've already got a huge one.

Yes, an enormous cash stash generates reliable dividend payments, interest payments, or even rent payments if that individual or family owns real estate. Consistent income isn't the only big benefit of having a billion bucks at your disposal. Billionaires' edge truly is the flexibility they have with any stocks they may own. Whereas you may feel compelled to make a tough selling decision now to ensure you're going to meet your portfolio's targeted value later, billionaires don't feel the same pressure. They can afford to truly be the buy-and-hold investor the average working person wishes to be.

That's the long way of saying billionaires are able to survive long-term performance droughts from some of their stocks that might give you ulcers.

3. Rich people have access to investment options you don't

Finally, if you think billionaires are playing on a level playing field, think again. Most of them have access to opportunities (and information) you don't.

Take Warren Buffett as an example. Yes, the Oracle of Omaha is brilliant, and Berkshire Hathaway (BRK.A -0.16%) (BRK.B -0.34%) has the long-term performance results to prove it. Berkshire Hathaway isn't just a collection of publicly traded stocks though. Berkshire also owns a few dozen privately held companies like Duracell batteries, Benjamin Moore paints, and Acme Brick Co. just to name a few. While Buffett makes or loses money on the ever-changing stocks held by Berkshire, these privately owned outfits generate cash for the company regardless of the market environment. Their steady cash contribution to the fund's bottom line allows Berkshire's managers to boldly hold on to struggling stocks. They may not be as bold without that recurring cash flow.

Another big Buffett win came shortly after 2008's subprime mortgage meltdown and the havoc it wreaked on most stocks -- banking stocks in particular. Yes, Berkshire's resident guru had the foresight to pour billions of dollars into Bank of America (BAC -1.02%) while it was down. It wasn't quite as risky as the purchase may have seemed on the surface, however. The Oracle of Omaha was also given the option to buy another 700 million shares of BoA years down the road at a price of around $7 apiece -- a perk awarded for essentially bailing the big bank out.

Unless you already had a few billion to loan Bank of America (and were willing to do so at the time), you wouldn't have gotten the same sweet deal. Indeed, had Buffett not gotten the deal, he may not have been such a big fan of the bank either.

Bottom line

Don't read too much into the message. There are still certainly a lot of great ideas to be gleaned from a billionaire's stock picks. They're not necessarily the ideal picks for you though. You're usually better of doing your own thing first and foremost.

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Stocks Mentioned

Berkshire Hathaway Inc. Stock Quote
Berkshire Hathaway Inc.
BRK.B
$309.29 (-0.34%) $-1.07
Berkshire Hathaway Inc. Stock Quote
Berkshire Hathaway Inc.
BRK.A
$464,250.00 (-0.16%) $-761.00
Bank of America Corporation Stock Quote
Bank of America Corporation
BAC
$34.81 (-1.02%) $0.36

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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