Warren Buffett is widely regarded as one of the most successful investors of all time, and his stock picks are closely monitored by average investors looking to follow in his footsteps. But not all his moves are so easily followed.
Why is this the case -- and how can you actually use this difference in strategy to your advantage?
Buffett buys in bulk
When Buffett makes a move, it's a big move by the standards of average investors. After all, a few thousand dollars won't move the needle for a multibillion dollar investment portfolio.
Buffet often looks to slowly accumulate large amounts of a specific stock, as his company, Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B), has done with Wells Fargo to amass its current stake of about 9% of the megabank.
But other times, Buffett has made major upfront investments in a company. For example, followers of the financial market will remember that Buffett made a $5 billion investment in Bank of America (NYSE:BAC) back in 2011. While this buy did demonstrate that he was bullish on the bank, the terms of the investment gave him a much better deal than any ordinary investor could hope for.
In exchange for the $5 billion, Buffett received $5 billion in Bank of America preferred stock and 10-year warrants to purchase 700 million shares of the bank at $7.14 per share. At the time, Bank of America's preferred stock generally traded between $0.80 and $0.90 cents on the dollar, but Buffett's preferred shares likely would have been valued higher had they been publicly traded, because unlike the other preferred shares, Buffett's were cumulative, meaning that any missed dividends had to be made up.
Additionally, the warrants he received carried significant value, as the shares were trading very close to the strike price, and the warrants had considerable time remaining before expiration. Buffett was offered a better deal because of the weight his name carries, and the ordinary investor doesn't have billions in the bank to make such a deal happen.
In November, it was announced that Berkshire Hathaway would purchase Duracell from Procter & Gamble (NYSE:PG) in a $4.7 billion sale. But this wasn't a standard unit-sale deal, and Buffett had a unique advantage unattainable by the average investor.
At the time, Berkshire Hathaway had well over $4 billion in P&G shares, which had grown to their current levels through massive share-price appreciation. If Berkshire had sold the shares, it would have been obliged to pay tax on the gain.
Instead, Buffett swapped $4.7 billion in P&G shares for Duracell and had P&G inject $1.8 billion into Duracell before it was sold to Berkshire. Through this carefully crafted deal, Buffett managed to obtain a solid business while avoiding taxes on the gains made on Berkshire's P&G shares.
Ordinary investors could never execute such a large swap deal, and because stocks can rarely be swapped for others tax-free, most investors will -find it difficult to escape capital gains taxes entirely.
Learning from Buffett
Buffett has a long history of beating the market, but he still wants to see individual investors succeed. He has long provided his insight on how investors can get ahead in the stock market, namely by resisting their emotions and seeking long-term gains through a combination of dividends and growth.
He's also a strong advocate of buying companies you understand, with large competitive moats to ensure stability. Reading up on Buffett's investing tips can be great way to learn some lessons on creating long-term wealth.
While Buffett has buying power and access to deals ordinary investors can only dream of, there's one area where Buffett himself concedes that the small investors have the advantage.
Business Insider noted that Buffett finds it more difficult to achieve high percentage returns on Berkshire's current investment portfolio than to manage a much smaller amount of money. Buffett added:
It's a huge structural advantage not to have a lot of money. I think I could make you 50% a year on $1 million. No, I know I could. I guarantee that.
In managing Berkshire Hathaway's multibillion-dollar portfolio, Buffett needs to produce huge gains in absolute terms to post meaningful percentage returns. While a typical investor with a $100,000 portfolio would see a 50% return from a gain of $50,000, a $50,000 gain for a $1 billion portfolio would only amount to a gain of 0.005%. Berkshire would need many more winning investments to produce a 50% return. Furthermore, when a small investor finds an investment with good return potential, he or she can move a large portion of their portfolio into it. However, with the amount of money under management at Berkshire, only a small part of the overall portfolio could be invested before Berkshire has essentially bought out the company or pushed its price into overvalued territory.
Investors with small portfolios have the advantage of being able to produce outstanding percentage returns. So while you can't get access to Buffett's special deals, you can still profit from finding undervalued investment opportunities too small to move the needle for Berkshire.
Do your own research
While the average investor cannot copy all of Warren Buffett's investments, they certainly can learn from his tips and have a look at what Berkshire Hathaway currently owns by examining its 13F form.
So while the average investor's portfolio size carries advantages and disadvantages, it's best to do your own research and consider whether Buffett's current investments fit with your overall investment strategy rather than trying to copy his moves.
Alexander MacLennan owns Bank of America Class B warrants. The Motley Fool recommends Bank of America, Berkshire Hathaway, and Procter & Gamble. The Motley Fool owns shares of Bank of America and Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.