Invest like Buffett or with him?

MarketWatchMay 6, 2014 

As much of the business world made its annual pilgrimage to Omaha, Neb., for the Berkshire Hathaway shareholder meeting this weekend, it is worth considering how well or poorly Warren Buffett might have fared if he ran a mutual fund.

That’s because every year at this time there are plenty of people — fund managers among them — who lay claim to investing “like Buffett,” among them some popular mutual fund managers. Morningstar Inc., for example, does an annual examination of funds that “buy like Buffett” at this time of year for investors who want to pursue a strategy like that of the Oracle of Omaha.

The real question, however, is why investors would buy a mutual fund that invests like Buffett when they could buy the original.

There is a logistical answer, of course, namely that Berkshire Hathaway trades for more than $190,000 per share on its A shares, and for more than $125 per share on its B class, one an impossibility for the average investor, the other high enough that it rules out the person who wants to slug small amounts of money into the market on a regular basis over time.

But Buffett’s success should make investors revisit one of the most basic investment decisions, whether to buy stocks directly, to invest in funds or to mix and match the two.

Funds, of course, are supposed to provide professional management and diversification at a reasonable price. If an investor wants to build a diversified portfolio on their own, they will have a hard time racking up meaningful positions in dozens or hundreds of stocks, where a mutual fund manager can quickly rack up the assets necessary to make diversification easy.

But Berkshire Hathaway is a stock that, in most respects, feels like a fund. Its portfolio includes names like Wells Fargo, Coca-Cola, American Express, IBM, Procter & Gamble, ExxonMobil and many more.

The Securities and Exchange Commission’s Investment Company Act of 1940 — the defining legislation for the mutual fund business — specifies that an “investment company” (read “mutual fund” for nonlawyer types) is any firm with more than 40 percent of its assets tied up in noncontrolling stakes of other companies.

Kind of sounds like Buffett’s Berkshire Hathaway.

There have been plenty of conglomerates to run on the edge of the SEC’s murky rules, many taking behind-the-scenes steps to stay on the stock side of things (buying government bonds rather than stocks with excess cash, for example, thereby reducing corporate ownership and the potential to be classified as an investment company).

Companies don’t want to be considered funds because they would face a whole new level of regulation. Say goodbye to stock options as compensation; say hello to greater shareholder say in who serves on the board of directors.

But that does not negate the fact that some stocks are as diversified — or more diversified — than traditional mutual funds, or that investors should not consider stock and fund investing mutually exclusive.

In 1995, the late Coca-Cola chairman Roberto Goizueta said in a midyear report to shareholders that it was important to make sure they didn’t have all of their eggs in one basket, and compared the company — and I was a shareholder then and remain one today — to a mutual fund.

“Your company not only has an abundance of ‘eggs,’ but an abundance of ‘baskets,’” Goizueta wrote, taking about how the company was operating in more than 200 markets around the world. “… Our business is like a global mutual fund, albeit under one management and in one industry. The difference: Our ‘fund’ combines the unlimited growth potential of a scrappy venture capitalist and the reliable muscle of a Fortune 500 stalwart.”

For most people, it’s a lot easier to pick one stock than it is to select a fund. With stocks, you can examine products and appreciate their potential, whether you’re looking at soft drinks, computers or some retail business.

With mutual funds, you’re examining portfolios that are always somewhat out of date, and the core holdings can change on a dime.

That said, it’s easier to select a portfolio of funds — where a few can cover the entire global market — compared with a portfolio of stocks, where true diversification into dozens of issues takes a lot of work.

Ultimately, the kind of confidence that Buffett inspires is the reason why investors are drawn to his company, the stocks he invests in and the funds that invest like him.

The best funds that mimic Buffett, according to Morningstar, have actually outperformed him, which is pretty good considering Berkshire Hathaway B has delivered a 16.2 percent annualized return over the last five years, and more than 6.6 percent on average over 15 years.

That doesn’t mean those managers are “better than Buffett” — Buffett himself might find the structure of a fund limiting and troublesome — but it’s a good reminder that there’s room in most investor portfolios for both, funds that give them a diversified core and stocks that give them long-term positions they have confidence in.

Chuck Jaffe is senior columnist for MarketWatch. He can be reached at cjaffe@ or at P.O. Box 70, Cohasset, MA 02025-0070.

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