Buffett style

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Sorry, You Will NEVER Be Able to Trade Like Buffett

Here’s a dirty secret of financial media: Putting Warren Buffett in a headline is pretty much guaranteed to give your article decent appeal. So it’s no surprise that everyone under the sun tries to derive meaning from even the slightest change Buffett makes — or more precisely, that his investment firm Berkshire Hathaway (NYSE:BRK.A, BRK.B) makes.

A few years ago, Buffett liked railroads and Buffett liked banks. Last year, he started to like newspapers. And as I just wrote last week, Buffett doesn’t like gold and hasn’t for some time.

But while interesting and good for clicks, this kind of oversimplification isn’t very helpful to investors.

Because no matter what you’d like to believe, there is absolutely zero chance you’ll be able to trade like Buffett and Berkshire. The tools at your disposal simply are not the same.


Goldman Sachs: At the height of the financial crisis, Buffett dumped $5 billion into cash-strapped investment bank Goldman Sachs (NYSE:GS). As a result, Warren Buffett recently cemented a deal to turn crisis-era warrants into a massive block of stock. That’s in addition to a 10% dividend on those preferred shares Berkshire negotiated in the dark days of the downturn, which cost Goldman about $500 million a year. If you think buying common stock in Goldman because Buffett did is analogous to this … think again.

Bank of America: Oh yeah, and Buffett negotiated a similar deal with Bank of America (NYSE:BAC) in 2011. The deal grants Berkshire Hathaway 10-year warrants to buy 700 million shares of stock at a strike price of — wait for it — $7.14. Shares are pushing $12 right now. And in addition, the preferred stock from the initial deal yields a plush 6%. You might have a 50% return if you dove into BofA the same time he did … but a penny a share in dividends and without the right to buy future shares at bargain price is a wholly different investment.

H.J. Heinz: Buffett famously has maligned junk bonds, saying “they’ll live up to their name.” He also was critical of many LBO deals that took place in the aftermath of the recession, saying that private equity firms investing with an “exit strategy” vs. and “entrance strategy” are bad for businesses. But this sentiment didn’t stop him from helping to orchestrate a massive $3.1 billion junk bond offering and take ketchup giant H.J. Heinz (NYSE:HNZ) private. Not only is a leveraged buyout in a different universe than buying common shares, but clearly Buffett has no problem saying one thing and doing another when it’s in his best financial interest.

This is not to say that Buffett is not a shrewd investor and a great CEO for Berkshire Hathaway. However, it’s worth noting that his tactics can not and should not be your own.

Like any big-time Wall Street player, Buffett has access to tools and information and deals that retail investors simply can’t share in.

It’s all well and good to buy Coca-Cola (NYSE:KO) or General Electric (NYSE:GE) or Johnson & Johnson (NYSE:JNJ) — three stocks that are quintessential Buffett holdings. But do so because your analysis of the current fundamentals and market conditions lead you in that direction.

Buying a stock just because its on Berkshire’s list of holdings or because “Buffett says so” isn’t a good idea — not because the underlying investment might be flawed, but because the difference in tactics will be like night and day.

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Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.

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