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Adapting Buffett's Approach

An individual could follow Buffett's style, but if a fund manager did, you probably wouldn't invest in his fund...

By now, everyone in India who is even vaguely interested in investments has heard that a man named Warren Buffett is visiting our country and that he is reputed to be the greatest investor in the world. Many of have also read about how the intrinsic value (as measured by book value) of Buffett’s company, Berkshire Hathaway has grown an average 20 percent over the last 45 years. Naturally, this raises the question of why others can’t emulate, or at least try and emulate, Buffett’s record as an investor. After all, the principles that Buffett’s investment strategy is based on are quite well-known. The old man himself is famous for explaining his logic and his decisions in great detail.

So why can’t you and me (or anyone else in the world) fill up a form and write a cheque and buy into a fund that follows these investment principles? One answer to that question is that we can, sort of. If you look at the whole world, then you will find that not only do mutual funds, hedge funds and portfolio managers who claim to follow the Buffett way exist, they are actually a substantial cottage industry.

However, it’s my guess that if a mutual fund manager actually tried to emulate Buffett, you probably wouldn’t invest in such a fund. The world of professional fund management and what Buffett does are two poles apart. Buffett invests for himself and his shareholders, and is effectively answerable only over very long periods of time, at all. The job of a mutual fund manager is to beat a benchmark and to be seen continuously beating a benchmark on a month-by-month basis. Buffett invests for a lifetime (“our favourite holding period is forever,” he has said), while the typical mutual fund investor can, and often does, pull out his money at will.

Buffett can afford to underperform everyone else for a long while (and did, during the tech boom) and then explain it away with a few witty aphorisms in his annual letter to shareholders. The mutual fund manager has to jump on to every passing bandwagon and then jump off it at the right time. Buffett can be as concentrated as he wishes. He is explicitly anti-diversification. He has often said that the right ways to invest is to be sure of something, and then make a large bet on it. This is the exact opposite of the very idea of a mutual fund.

Despite the fact Buffett runs a public company and buying the shares of that company is almost like investing in a mutual fund, he is effectively an individual investor. His approach would be far easier to emulate for an individual. Sure, at this point in his carrier, Buffett only makes multi-billion dollar investments, but the entire empire is built on the foundation of the basic principles of value investing, as taught by his guru Benjamin Graham. Instead of trying to locate a mutual fund manager who emulates Buffett, you could make a beginning by going to a bookstore and buying a copy each of Graham’s seminal books, Securities Analysis and The Intelligent Investor.