If you have spent any time at all watching Wall Street, you've probably read an article (or 50) about Warren Buffett. He was famously trained by investing icons Benjamin Graham in the art of value investing and Philip Fisher in the art of growth investing.
He has combined the two styles into something akin to buying great companies at reasonable prices...and holding them. When Buffett makes a move, investors pay very close attention. But you can't control his decisions, only what you do about them.
Harder than it sounds
Investors think Warren Buffett has almost superhuman investing powers, which probably isn't the case. I'm fairly confident, having read the down-to-earth annual reports from Berkshire Hathaway (BRK.A -0.76%) (BRK.B -0.69%) for years, he wouldn't describe himself as super anything (though he might tell you that his partner, Charlie Munger, is something special).
In truth, if you watch closely, Buffett makes his fair share of mistakes. The key is that his winning trades have more than outweighed his missteps. And a lot of that is thanks to investments that he has held on to for years on end.
Image source: Getty Images.
The single most direct way to benefit from Buffett's well-tested investment approach is to buy the company he runs, the aforementioned Berkshire Hathaway. This is a massive conglomerate that spans the insurance, energy, and transportation sectors, among other things.
It is also where Buffett's key stock investments reside, effectively inside the portfolios of Berkshire's insurance companies. He owns a huge stake in Berkshire Hathaway, so you are basically investing alongside the legend himself.
But take some of his advice just the same: Hold for a long time. In any given year, Berkshire Hathaway might outperform or underperform. It's the long-term growth of the business that has created so much wealth for Buffett and his long-term shareholders.
Going it alone
If that's not exactly how you want to invest, given that owning one stock is definitely not a diversified portfolio, the next choice is to simply track what Buffett does and mimic it. There are a number of ways to do this, from reading 13F filings yourself to using a service that tracks those filings.
A 13F is a Securities and Exchange Commission form that large investors have to file to report their holdings after the end of every quarter. There's a delay, and you need to actually dig in to see what's new, what's gone, and what positions have changed. But, with a fairly minor lag, you can end up with a portfolio roughly akin to what Buffett owns.
The risk, of course, is in the lag. You will most likely be buying and selling at different prices and, thus, your performance will be different. In fact, you might end up buying at a price that Buffett would not have considered.
You also need to be very careful that you don't deviate from the approach when it comes time to sell. It might be tempting to decide you want to keep a stock he sold because you like it, but if you are trying to track Buffett, that's going to result in dramatically different results over time.
But this does bring up a third option you can consider. Instead of trying to mimic Buffett's every move, you can use his investment decisions as a source of ideas. So, instead of buying Occidental Petroleum (OXY -0.15%) just because he did, you can make your own judgment call on the stock. That said, he doesn't trade very often, so the flow of ideas is likely to be slim.
Yet another option along the same line of thinking is to examine what Buffett buys and try to find something that is roughly similar but perhaps more to your liking. For example, instead of Occidental, which Buffett bought during a unique merger situation, you might examine large oil companies.
That could lead you to an ExxonMobil or Chevron. Both of these global integrated energy giants, by the way, have performed better than Occidental in recent years, as the chart above shows. Occidental's underperformance was driven at least partly by merger debt the company took on.
This last approach, meanwhile, will also allow you to examine investments that Buffett makes that aren't public. For example, the company recently bought midstream energy assets from Dominion Energy. You can't buy those businesses because they were, effectively, taken private. But you could examine Enterprise Products Partners (EPD 0.45%) as an alternative and collect the master limited partnership's huge 7.4% distribution yield.
That distribution has been increased annually for roughly a quarter of a century, and the payment was covered 1.9 times over by distributable cash flow in the first quarter (which is a very strong number). It's not exactly what Buffett owns, but it's not a bad substitute.
Working the theme
At the end of the day, you can't actually do exactly what Buffett does because, well, only he can do that. However, there are different ways to track and react to his moves. The most direct option is to buy Berkshire Hathaway stock.
After that you can watch what he does (and says) and tag along, make your own decision on each idea, or find alternatives that are similar.
The key to all of this, however, is to find an investment approach that is appealing to you and that you can stick with over the long term.
