If you’ve ever invested in, or even considered investing in, a stock or ETF, you probably know the name Warren Buffett. Amongst the most famous investors of all time, Warren Buffett is chairman of Berkshire Hathaway ($BRK.B) and a long-term value investor.
Mr. Buffett started his investing career with $174,000 in personal savings, and as of March 2023 has a net worth of over $100 Billion. Let’s review a bit about his history and investment approach.
Benjamin Graham: The Man Who Inspired Buffett
While you’ve probably heard of Buffett, you may not have heard of Benjamin Graham. Mr. Graham was an investor, professor, and economist born at the turn of the 19th century. He taught, and later employed, a young Warren Buffett and inspired his investing philosophy, which is described extensively in his classic investing book The Intelligent Investor.
Graham is considered the “father of value investing” - an investing philosophy that focuses on investing in good companies at reasonable prices, and letting them grow through a buy-and-hold strategy. When he was starting out, Warren Buffett focused on buying “great companies at cheap prices”, or hunting for bargains in the stock market. But cheap stocks can be hard to find. Over the years, his approach has evolved to buying great companies at fair prices. A famous Buffett quote goes “It is far better to buy a wonderful business at a fair price than a fair business at a wonderful price.” This explains why he bought 5% of Apple in 2016, when Apple could hardly be called cheap.
Mr. Market: Graham’s Advice on Investor Psychology
One of the most famous concepts that Benjamin Graham outlines in his classic book The Intelligent Investor is the character of Mr. Market. Imagine you own shares of a publicly traded business, and you have a friend named Mr. Market. Mr. Market is very interested in the price of your business. Every day, without fail, he tells you what he thinks your shares are worth, and offers to buy them from you or sell you more at his quoted price. The only problem is, Mr. Market is prone to mood swings. One day he’ll quote you a ridiculously high price. The next day he’ll think the company is worth next to nothing. In short, Mr. Market is not reliable on a day to day basis, and you would be wise not to trust him. Or at least think twice before believing what he tells you.
The point of the Mr. Market character is two-fold. First, you shouldn’t get too excited about the day-to-day fluctuations in share prices. Markets are prone to over-reaction. They get really excited about good news, sending the price of stocks shooting up to the moon. On the flip side, they get really depressed about even a hint of bad news. Sending a stock price spiraling down on an earning’s miss, or even an indication the future won’t look quite as rosy. If you followed Mr. Market, you’d be buying when and selling all the time. Spiraling between optimism and pessimism.
Dollar Cost Averaging: Smoothing Out Mr. Market’s Mood Swings
So what’s an investor to do? One approach, which Warren Buffett has recommended to consumer investors who aren’t willing to spend hours every week researching stocks, is dollar cost averaging. You can read our primer on dollar cost averaging here, but in short, dollar cost averaging is the consistent (weekly, bi-monthly, monthly etc.) buying of stocks in the same amount. For example, investing $100 on the first of every month into the same group of stocks. With dollar cost averaging, on days when Mr. Market is overly optimistic, you’ll buy less shares and on days when Mr. Market is depressed, you’ll be buying more shares. Over time, you’ll be more likely to smooth out the fluctuations of Mr. Market and (hopefully) get a fairer price.
Building a Warren Buffett ETF
For many investors, investing like Warren Buffett looks like a cheat code. Instead of trying to research stocks themselves, they’d rather just copy the moves of one of the best investors of all time. Using Google Trends, interest in Warren Buffett portfolio significantly outstrips other popular investors like Nancy Pelosi.
Since Buffett’s holding company, Berkshire Hathaway, is publicly traded on the New York Stock Exchange, they disclose their investments to the public every quarter by filing reports with the SEC. Turns out, copy trading like Warren Buffett can have pretty good results, according to researchers. In a paper published out of the University of Nevada and the Kogod School of Business, the researchers analyzed Warren Buffett’s portfolio performance over a 30 year period from 1976 to 2006, and found that Buffett and his team outperformed the S&P 500 by an average of 11.14% each year. They then went further, and analyzed a portfolio that did nothing but copy trade Warren Buffett one month after his trades were disclosed to the public, and found that that hypothetical portfolio outperformed the S&P 500 by 10.75%. So even trailing Buffett by a month beat the market by almost as much as Buffett himself did!
So how do you copy Buffett? As of this writing, there is no Warren Buffett ETF currently available to investors. You can read his company’s SEC filings and try to track his trades yourself. There are also websites like HedgeFollow that helpfully aggregate this information so you don’t have to read through hundreds of pages of filings. So you could manually simulate a Warren Buffett ETF yourself. That’s what we did with the Buffett’s Top 10 strategy on Share, a portfolio composed of the largest positions in Buffett’s portfolio that we update quarterly, after every new Berkshire Hathaway disclosure.
So which has performed better, historically? We decided to compare the performance of 5 years of dollar-cost averaging into Berkshire Hathaway directly to our version of a Warren Buffett ETF, while using the S&P 500 as a baseline.
Using our dollar cost averaging calculator, we found that both Berkshire Hathaway and our Warren Buffett ETF would have beat the market. At the time of this writing, 5 years of weekly investments in the S&P 500 would have returned a total of 25.3%, the same investments in Berkshire Hathaway would have returned 33.2%, and investing in the stocks in our Warren Buffett ETF (in equal weights) would have returned 45%. It’s important to note that past performance does not guarantee future returns, but copying Buffett is looking pretty good from here!