Investing Strategy of Warren Buffett: You Can’t Just Copy

Every year, via Berkshire Hathaway’s annual letter to shareholders, Warren Buffett shows us his portfolio. Moreover, so many great investors also tell about his approach – whether it is blogs, YouTube channels, or apps. Can we just copy-paste investing strategy of Warren Buffett?

Technically you can copy Warren Buffett’s portfolio, all is out there. But it won’t make you rich quickly. You can allocate some portion of your money and copy exactly the Berkshire Hathaway portfolio, but the result will be different.

How could? Because you aren’t running Berkshire Hathaway.

The Nature of Berkshire Hathaway:
The Largest US Infrastructure Holding, Not The Collection of Asset

One of the most misunderstandings about Berkshire Hathaway is that the Nebraska-based company is a “holder” of stock collection. People think that the stock market is the only way Berkshire Hathaway makes money.

Berkshire Income Statement 2021

Look at the figure.

Berkshire Hathaway breaks down its revenue into two segments. The first segment is insurance and similar business. The other is Its infrastructure business, that is railroad, energy, utilities, and some kind of it. That is where the money comes.

So, back to our question. This is why even if you replicate the portfolio in an exact way, the result will be different.

Investing Strategy of Warren Buffett analyzed by looking its asset.
Berkshire Hathaway Asset composition

No Capital Gain:
Investing Strategy of Warren Buffett Does Not Consider Capital Gain

How do you measure your investment success? Capital gain? Of course.

Warren Buffett doesn’t.

In the annual letter 2021, The Oracle of Omaha emphasizes that Berkshire Hathaway does not include capital gain as revenue. As you can see in the figure below:

Investing Strategy of Warren Buffett does not rely on capital gain.
Berkshire only count dividend in its income statement

Buffett only counts dividends from Apple and the stock he holds, not the capital gain. The capital gain is reflected in the balance sheet.

More detail of Berkshire Hathaway asset.

Investor Corner

Buffett focused on picking the business that give him sustainable earnings.

After getting to know that Berkshire is a “real business” and not a “pool of stock investment”, we are ready for the next step.

Business Picker, Stock Picker
The Oracle, and The Alchemist

Why we can’t just replicate Warren Buffett’s idea? The first and foremost difference is the purpose of investment. This makes a clear border between Buffett’s style and retail style. Unlike most retail investors that pursue capital gain, Warren Buffett’s priority is to take control of a certain firm. Quoting Berkshire Hathaway’s annual report 2019, ” When we spot such businesses, our preference would be to buy 100% of them.”

Even, to gain control, Berkshire Hathaway was willing to pay more than the market price. This is the case when Warren Buffett tries to acquire Heinz, paying 20% more than Heinz’s highest price.

Control will give privileges for The Oracle such as access capital structure, change the strategy, change dividend policy, or enhancing other Berkshire subsidiaries. Control gives more certainty that management work for Buffett.

Parental Privilege:
Investing Strategy of Warren Buffett’s Supported by His Privilege

Moving forward for more bitter truth. Another reason why we can’t be The Famed Investor is that Warren Buffett was born differently. Unlike most of us, Warren Buffett has “innate” advantages like:

  1. Warren Buffett started his investment portfolio with 6k USD when he was only 15. Adjusting to the inflation rate, it is worth 61 k today. Some of us may don’t have this amount to begin investing in the stock market. And 15 years old?
  2. Warren Buffett has a business and investing background that supports him. He learned much from Ben Graham, but he did not start from scratch. His father is Howard Homan Buffett, an American businessman, investor, and Nebraska politician. Republican, four-term. Most of us have no investing or business background. We have a steeper ladder to climb than the Oracle of Ohama. His prestigious background also helps him to take over Berkshire.
  3. As Berkshire Hathaway1 CEO, Warren Buffett gets paid by doing his job. Much different from us. None will pay us for our investing activity. We need to keep feeding our family and at the same time, composing our investing thesis. Buffett doing it all at once.
  4. Still from Berkshire Hathaway, the Omaha-based is holding company. Meaning that it is a pool of money. What Warren Buffett invested is “other person” money. So, If there is an investment loss, Buffett doesn’t bear it single-handedly – as the opposite of us: our money, our responsibility.

So we hope the reader could change their mind if necessary. Never imagine Warren Buffett like a retail investor that has a large amount of money under the “Berkshire Hathaway account” that buys or sells in the stock market. He was born different and acts differently.

And by the way, another entrepreneur like Bezos was also born with privilege. Well, I did not try to drag the mentality down, but come on, be realistic.




The Algorithm of Warren Buffett’s Investing Strategy:
Insurance of The Success

Since the beginning, Warren Buffett’s focus is on the insurance business. The reason is that this kind of business gives Warren Buffett capital at the front that can be paid later. In the insurance world, it is called the premium. Warren calls it to float.

This free cash flow gives Warren Buffett a free bullet to bombard the stock market if needed. Once he sees a potential company, Oracle of Omaha could unload the cash and make an investment. Warren Buffett could maximize his business as well as his investment.

Warren’s algorithm is like this: find a business that could generate free cash flow into his pocket then launch it to make an investment in the stock market.

The Lesson
You Can Still Learn from Investing Strategy of Warren Buffett

Let us summarize what we have

  1. There is a good businessman. Bill Gates, Steve Job, Jeff Bezos, Elon Musk… Mark Zuck… And there is also a good investor. Peter Lynch, Seth Klarman to name a few. Warren Buffett is the best of that two worlds. He is a first-class businessman that invests like a first-class investor. For this reason, not everyone could copy his exactly.
  2. Though, Warren Buffett – even not originally come from him – has built a strong foundation for quality investing. A term like Margin of Safety, intrinsic value, and economic moat become the most helpful and practical aspects of quality investing.
  3. Try to make your own systems like Warren Buffett and his insurance business. The float from insurance plays a role as a free bullet.

And the last,

Let there be no excuse

  1. Berkshire Hathaway is Warren Buffett investing vehicle []