Why You Can't Invest Like Warren Buffett

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No investor is more closely watched and more imitated than Warren Buffett. Millions of investors, mesmerized by this man who has become a legend in his own time, seek to follow in his investing footsteps.

They fall deeper into a trance of idol worship with Buffett's every pithy comment. Dreaming of riches to come, they buy whatever Buffett does. Yet these Buffetteers could no sooner mimic his methods than they could dunk a basketball like LeBron James. The reasons come down to a reality that is eclipsed by the media aura surrounding Buffett and his renown as the Oracle from Omaha.

Buffett's wealth stems from running Berkshire Hathaway, a vast conglomerate that owns dozens of large companies, including Fruit of the Loom, GEICO, Dairy Queen, Helzberg Diamonds and NetJets.

Buffett, Berkshire's chairman and CEO, makes all the investment decisions for the company and its subsidiaries. His mind-boggling wealth comes not from his own personal portfolio, but from his ownership stake in Berkshire Hathaway.

See my Buffett Mythbuster video.

Buffetteers purchase the stocks that Berkshire Hathaway does without considering the significant advantages that Berkshire gives Buffett, enabling him to generate spectacular returns. Chief among these is a permanent stream of capital from companies like GEICO, which is awash in cash from insurance premiums. As Berkshire businesses have grown over the years, so has the amount of money that Buffett has put to work in the markets.

Investing for a cash-rich corporation puts Buffett in an extremely unusual, if not unique, position because it enables him to weather market storms that the rest of us can't. This gives him an advantage not only over individual investors but also over professional portfolio managers who, to keep clients, must produce returns for them year in, year out or investors may bail. Because of these demands, they can't take the hits that Buffett can.

Understanding the differences between investing for a corporate conglomerate and doing so for yourself can keep you from losing your shirt trying to be Buffett. It can also help you understand key investing principles and how to apply them to your portfolio. To do this, you must learn to identify the Buffett traps — investing moves that sparkle with Buffett allure but, for non-conglomerate investors, are fraught with risk. By finding the right routes around the following traps, you can improve your investing process:

• Time horizon trap: Your time horizon for investing isn't infinite. Someday, you'll be investing less because you'll stop bringing home a paycheck and will be drawing from your portfolio to pay for living expenses during retirement.

In planning for this, the goal is to build up assets and manage them well so you don't outlive your wealth. Yet Berkshire will keep going long after Buffett dies, and the corporation will never retire; it will always have a source of investment capital from its many companies.

Buffett's lack of a time horizon allows him to dollar-cost average for immortal time periods. Dollar-cost averaging is periodically buying a fixed dollar amount of a stock on a regular schedule, thus getting more shares when the price is low and lowering the average price of shares accumulated. Without a time horizon, Buffett can do this indefinitely. But if you do it too long, your portfolio may not have time to recover from purchasing shares at a high price.

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