Warren Buffett is widely viewed as one of the most successful investors of all time.
Because of his incredible skill in building wealth through investing, many people track the stocks that he owns and the investment moves he makes with the goal of mimicking them and making successful investments of their own.
In reality, however, the fact that Buffett invests in a stock shouldn’t matter to you when it comes to making your own investment choices. And there are three big reasons why that’s the case.
1. Buffett very likely has different investing goals than you do
Buffett doesn’t just pick investments in a vacuum. The Oracle of Omaha and his advisors have specific goals in mind when they select the mix of companies they buy into. The purpose of his picks may be to add some diversification to the existing mix of companies he owns, hedge against another bet he’s made, or accomplish some other objective entirely.
Your investing goals are probably very different than Buffett’s. You may be investing for retirement in 20 years, or aiming to earn your first million ASAP through wise investments that beat the market. The specific investment mix you’d need to accomplish these objectives is likely different than the mix of investments someone would chose if they are a billionaire who is buying investments for a holding company.
2. You don’t have Buffett’s portfolio
When Buffett invests, the assets he purchases become part of a larger portfolio of holdings. You don’t have the same mix of existing investments that Buffett does, nor would it be possible for you to invest in everything his company Berkshire Hathaway owns.
While a purchase may make sense for Buffett in light of his existing holdings, it may not be a logical one for you based on your existing mix of assets. Each asset you buy should be chosen based on its place within your portfolio, and you can’t do that if you’re just mimicking some of the trades of another investor.
3. You don’t know Buffett’s reasoning for making a purchase
While Buffett has outlined his investing philosophy numerous times, he doesn’t explain the reasoning behind every acquisition. If you’re taking advice from investing professionals, your focus shouldn’t be on what they buy but on assessing the reason behind the acquisition so you can decide if it’s a solid investment for you.
Without knowing why Buffett was interested in a specific asset he purchased, it’s difficult for you to determine if the investment is a sound one for you given your investing thesis and your timeline for drawing on your invested funds.
Don’t copy Buffett’s trades — mimic his investing philosophy
To build wealth while investing, Warren Buffett is a good source of advice if you pay attention to how he invests rather than what he invests in.
Buffett has made clear that he invests for the long term, indicating his favorite holding period is “forever” and advising against owning any stock you wouldn’t be comfortable keeping in your portfolio for at least 10 years.
In past letters to shareholders, he’s also explained that he looks for companies with a durable competitive advantage and prioritizes an outstanding management team because he believes solid managerial skills have a substantial impact on a company’s intrinsic value.
You can adopt these same techniques in your search for companies to invest in — while looking for investments that are a good fit for your personal portfolio and your financial goals. This is far more likely to be a successful approach than simply buying shares of a company because you see that it’s a Warren Buffett pick.
10 stocks we like better than Walmart
When investing geniuses David and Tom Gardner have an investing tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*
David and Tom just revealed what they believe are the ten best stocks for investors to buy right now… and Walmart wasn’t one of them! That’s right — they think these 10 stocks are even better buys.
Stock Advisor returns as of 2/1/20
Christy Bieber has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares). The Motley Fool recommends the following options: long January 2023 $200.0 calls on Berkshire Hathaway (B shares), short January 2023 $200.0 puts on Berkshire Hathaway (B shares), and short June 2021 $240.0 calls on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.