3 Surprising Reasons Why You Shouldn’t Invest Solely in Warren Buffett Stocks

Warren Buffett-led Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) stock hit a fresh all-time high last week as a broader market rebound paired with the strength of Buffett’s core holdings.

As attractive as Buffett stocks like Apple, United Parcel Service, and Procter & Gamble are, there are many excellent reasons why you shouldn’t just stick to Buffett stocks. Here are three of them.

Image source: Getty Images.

1. You want exposure to top-growth industries

Some of Buffett’s best long-term winners are more traditional businesses, like Coca-Cola and insurance companies — not technology stocks. In fact, input from other directors on Buffett’s team is largely why Berkshire began accumulating a large stake in Apple stock in 2016.

Berkshire Hathaway is so much more than the publicly traded companies it owns. For example, the market cap of Berkshire Hathaway is $778 billion, while the value of its stock holdings is just $352 billion. Berkshire has massive investments in insurance companies, manufacturing, railroads, energy, utilities, and other businesses. The value of these companies, including their assets and real estate, is worth more than the stocks Berkshire owns.

Buffett is famous for operating within his circle of competency, which leaves out a lot of compelling growth stocks. Investors who prefer more cutting-edge growth sectors in areas like electric vehicles simply wouldn’t be interested in the more traditional businesses that Berkshire owns or has a stake in.

2. You want to take more risk to seek more reward

The companies that Buffett owns are mainly large, established businesses with good balance sheets and stable cash flows. While these companies certainly make for compelling long-term investments, they tend to have less upside and be less volatile than smaller companies.

Investors looking for more reward, at the cost of more risk, might not find Buffett stocks attractive. And even if a business seems like it would fit nicely into the Berkshire portfolio, Buffett is unlikely to overpay for a business even if he likes it.

Over time, Buffett tends to double down on his best ideas and chuck his worst ones. That kind of concentrated investing style is what has helped Berkshire beat the market over the long term. So even if you aren’t interested in the types of stocks Buffett invests in, his conviction to invest in what he is most confident in is a relatable lesson.

3. You don’t mind paying a premium price for a great stock

No one likes paying more for something than it’s worth. In fact, overpaying is exactly what value investors like Buffett warn against. As mentioned, Buffett is unlikely to invest in an expensive growth stock even if it has a lot of potential. And that’s going to leave a lot of exciting companies out of Berkshire’s portfolio.

However, some investors are OK with paying what looks to be an expensive price for a business that they believe will grow into its valuation over time. Many of today’s best technology companies have looked expensive at one time or another. Similarly, many of today’s top dividend stocks used to look expensive but now look cheap. For example, Buffett famously passed on Walmart stock, which has so many of the qualities Buffett looks for, because it was just too expensive at the time.

Another regretful decision was when Buffett sold his stake in Walt Disney too soon. In 1966, a consortium of investors that included Buffett acquired a 5% stake in Disney for just $4 million. That 5% stake would have been worth $12.65 billion today, a 3,162-fold increase.

Most investors would probably be better suited selecting some of their favorite Buffett stocks and then pairing those with some other businesses that they like. Risk-averse investors may do even better sticking mostly to Buffett stocks. And risk-tolerant investors may not want any Buffett stocks at all. It all comes down to your investment style, risk profile, and time horizon.

Coming out on top

Despite your personal interest in Buffett stocks, we can all learn a thing or two from the Oracle of Omaha. Buffett and his team took a lot of flak for keeping too much cash on the sidelines and not investing more in tech stocks that produced the bulk of the market’s gains since the financial crisis. Yet Buffett decided it was best to stick with his value bent and invest in a way that was best for him and that let him sleep at night. Of course, his goal is to beat the market. But he would do it on his terms, not by chasing what was working in any given time period.

In this way, Buffett didn’t let market noise get to his head. And with Berkshire stock now up 18% year to date (YTD) compared to the S&P 500 being down 5% YTD, it certainly seems as though Buffett’s patience has paid off.

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Daniel Foelber owns Walt Disney and has the following options: long April 2022 $135 calls on Walt Disney, long January 2024 $145 calls on Walt Disney, long July 2022 $145 calls on Walt Disney, long June 2022 $170 calls on Walt Disney, short April 2022 $136 calls on Walt Disney, short January 2024 $150 calls on Walt Disney, short July 2022 $150 calls on Walt Disney, short June 2022 $175 calls on Walt Disney, and short May 2022 $145 calls on Walt Disney. The Motley Fool owns and recommends Apple, Berkshire Hathaway (B shares), and Walt Disney. The Motley Fool recommends the following options: long January 2023 $200 calls on Berkshire Hathaway (B shares), long January 2024 $145 calls on Walt Disney, long March 2023 $120 calls on Apple, short January 2023 $200 puts on Berkshire Hathaway (B shares), short January 2023 $265 calls on Berkshire Hathaway (B shares), short January 2024 $155 calls on Walt Disney, and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.

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