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Why you should do what Warren Buffett says and not what he does

June 20, 2017

Last week I presented a speech to 500 CPAs at the AICPA ENGAGE Mega Conference in Las Vegas on how Warren Buffett did it. I have been giving this program for over three years, it is one of my favorites and always gets many questions from those attending. Today I want to share why you should do what he says and not what he does.

The “what he says” part is easy. Long term investors should invest in the stock market and specifically an S&P 500 index fund. My comments about this: The S&P 500 index fund is a diversified portfolio of stocks in the largest United States companies. It is low cost, has international exposure through the foreign operations of its components, pays a proven consistently growing dividend of about 2% and has upside potential as the United States and World economy grows. As long as the “price” of the index fund is not overstated it is a relatively prudent investment. The “price” is indicated by the P/E ratio which right now is a 24 trailing P/E [which I think is high] and a forward P/E of about 19 [which I think is a little high but not unreasonable in today’s economy].

The “what he does” is not easy, is impossible to emulate and represents a completely undiversified portfolio. Periodic news stories refer to Buffett’s Berkshire Hathaway [BRK| beating the S&P 500 stock index by an over 10% (20.8% vs. 9.7%) annual average over the past 52 years. That’s so, but this performance includes cash flow from investments in 89 private companies employing over 367,000 people which are continually reinvested with no dividends being paid to BRK stockholders. The S&P 500 companies pay approximately 40% of their earnings as dividends so these amounts are not available for future growth within the companies. On some level the stockholders invest this money separately but those earnings are not figured into the cumulative returns [and should be to truly compare performance].

Its public portfolio is comprised of 46 stocks with 6 making up over 70% of its portfolio. Also its allocation is skewed to 3 sectors making up 80% of the portfolio – Financials, Consumer Staples and Technology. Totally not diversified and in my opinion it would be irresponsible for anyone to try to match what BRK has done.

Another part of that 52 year return includes higher than market rate dividends on convertible preferred stock BRK received in exchange for its investments when a company was desperate for cash including Heinz, Coca-Cola, Bank of America and Goldman Sachs. These are not opportunities available to anyone else.

Touting the 20.8% vs. 9.7% “outperformance” is accurate but a totally misleading result. It might make an interesting read, propagates the legend and “sells” newspapers or gets clicks and supports investment advisors that tell you that you can invest like Warren Buffett. Not so! Further, Warren Buffett tells you not to try to duplicate his strategy – he says to buy the S&P 500 index fund.

If you want to catch on to his coattails, you can buy BRK today and hope for it to outperform the S&P 500, but certainly should not expect the 52 year trailing return.

Do what he says, not what he does!

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