7 Easy Steps to Invest Like Warren Buffett

Who doesn’t want to invest like Warren Buffett?  It’s easier than you think.  You just have to follow these 7 easy steps:

1)  Talk all sorts of smack about hedge funds but first spend the initial 10 years of your career running a hedge fund that charges 25% performance fees on top of 6% gains.

2)  Amass enough capital (by charging massive fees) to buy multiple entire companies.  Do it in a distressed debt/activist strategy, but later on spin it off as “value investing”.

3)  Use your insurance arm (from the company you bought in a distressed debt play) as a massive cash flow machine in which you’re essentially a leveraged covered call option writing operation.

4)  Tell the world that they should just buy index funds and then spend most of your time building a portfolio around individual equities.

5)  Tell the world that fixed income is dangerous while maintaining billion dollar positions in bonds.

6)  Constantly refer to derivatives as “time bombs” while maintaining billion dollar derivative positions.

7)  Obtain a red phone to the US Treasury department so you can help them arrange a rescue plan that starts by rescuing your operation when it looks like the economy is collapsing.

See, it’s easy.  Now go get started.  You’re welcome.

Cullen Roche

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services. He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance and Understanding the Modern Monetary System.

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Comments

  1. #1: 25% fees on returns over 6% is a hell of a lot cheaper than a 2/20 hedge fund fee scheme. And, actually, depending on what partnership we’re talking about, Buffett participated in the downside. The “Buffett Associates” fund paid WEB half of profits above 4% but also required WEB to make up 25% of all losses.

    #2: Why do you imply that “distressed debt/activist investing” is at odds with value investing? Distressed debt investing is probably the purest form of value investing. Activist investing is perhaps less strongly associated with old school value investing, but all the prominent activist investors I can think of at the moment (Greenlight, Pershing Square, Jana Partners, Icahn) all consider themselves value investors.

    • The problem is, the Buffet style value approach is always being sold as something the small guy can do himself. Which is ridiculous.

      • Since when? You seriously thing there is a single retial investor that thinks he replicate the returns of the greatest investor of all time with a dink and dunk brokerage portfolio?

        • You must be totally oblivious about the amount of sales material, books and articles that claim the retail investor can replicate Buffett’s style.

          • I dunno. The last 5 years certainly offered second chances, at least, to purchase attractive securities at low prices. Do you have to be a genius to differentiate between HCC and HALL? Do you need a prime brokerage relationship to understand Oshkosh B’Gosh? Are super capitalized small banks in niche markets (NARA/BBCN and WIBC) really so inscrutable AFTER credit metrics begin to improve? It’s easy to that I am monday morning quarterbacking, but just look at these situations, and then appreciate how long the market gave to make up your mind. Huge returns are an opportunistic game, but good lord, don’t pass them up because someone said that it couldn’t be done.

          • Really? Show me a book titled “Follow the instructions in this book exactly and become the second richest man in the world”. Is there a book that shows me how loan $5B to GS or BAC at 10% interest? Where’s the book that teaches me how to bail out Bear Stearns? Where’s the book that teaches me to buy up insurance companies and use their float gobble up billion dollar companies whole? Where’s the book that shows me how to do an LBO of Heinz?

            There’s millions of books showing mom and pop investor how to do all of these things right?

        • There’s tons of books, articles, courses etc. who sell just that idea. I read some of them myself. And yes, there’s tons of retail people with delusions of grandeur.

  2. I think it goes without saying that the little guys shouldn’t try and build portfolios like the huge institutional managers. Just leave it to KISS and focus on the rest of your life (if not involved in finance).

  3. For WB there was hard work involved but also like many of the American oligarchs he has mastered the art of the relationship in NY and Washington. If it wasn’t for the generosity of US treasury and legislative branch WB would be sitting with his Benjamin Graham textbook and portfolio that’s 50 cents on the dollar (as well as Dimon,Blankfein et all). From my viewpoint he lacks dignity, you can see how he relishes the attention that the young women of CNBS provide. For someone that is richer than every other single American his unending self promotion is tiring. Gates on the other hand dove into improving education, heathcare and eradicating disease. He could have stood to learn a bit from Bill Gates on subject of technology and even more in how to be a human being.

  4. I know you’re having a little holiday fun, but posts like these would be more helpful if you provided some guidance about how to proceed rather than just saying we shouldnt try to copy Buffett’s approach.

    • I was writing this partially in jest. The important lesson from Buffett is that he’s not doing anything that can be replicated by the average retail SAVER.

      • ..ands that’s why we need a small rise in interest rates for savers wether it’d be college, life expenses or a rainy day fund. With the current economy, fair is in the range of 2.75% on the 10 year and another 150 basis points for 4.25% on LT funds. Uncle Warren already has more cheap money than he knows what to do with.

  5. I’ve long maintained that buffett and soros are exactly the same in substance, only different in style.

    soros openly tells you that he wants the gov’t to take control of the economy and pay him rent in the process.

    buffett tells you that he is on the little guys side in an attempt to make himself look harmless and good, while all along playing the same devious game as soros.

    iow, soros isn’t hiding behind bs. buffett is.

    • His persona is part of his master investment strategy just like a poker player represents a certain table image. Where’s the bs? If you get bluffed in poker do you call bs?

      Yes web is two faced hypocrite, but that’s how the game is played and he’s the best at it. No need to be mad about it.

      • I think hypocrisy requires some deception, and I don’t see a clear argument that lying has occurred. However, you are certainly right that Buffett tries to manage his investor base. The “do what I say, not what I do” reputation is built by headline readers, or people with low reading comprehension.

  6. Ya know, if any of you had the chance, you would have jumped at the chance to invest with this guy years ago.

    And yes, some of the opportunities that he has are not available to the small investor, but as he has said, there are many many more opportunities available to the small investor than to him because of the scale that he has to invest.

    Cullen, I like you, we’ve spoken at length, but for you to write:

    ” The important lesson from Buffett is that he’s not doing anything that can be replicated by the average retail SAVER.”

    Well that’s just false…He’s buying stock like you and I could do, and making out very well.

    He’s doing a lot that we could be doing…if we were individually smart enough.

    Maybe you guys are, I’m not.

    Casting false aspersions on him does no one any good.

    It sounds like sour grapes.

    If you don’t like him/his politics/his statements/ etc that’s fine…but learn from him.

    I think he’s frank, honest, and willing to be open about how he does invest.

    Maybe some of you could copy him now while you’re young and build the capital that he’s accumulated in his 80′s..so you have all of those wonderful opportunities like he has now.

    That’s what he did.

    ….or you could just complain.

    My bet is you’ll do the latter.

    Good luck.

    • I think people are getting the wrong message. I greatly admire Buffett and his approach. I am not saying he’s a bad guy or complaining about what he’s done (I’ve said that many times here in the past). But don’t mistake his approach for simply picking stocks just like everyone else does. It’s FAR more complex than that. That’s the main lesson here. I’ve studied Buffett intricately and the thing to understand about him is that he’s not doing anything that’s remotely close to “buying stock like you and I could do”. His biggest home runs have involved far more complex situations than simple secondary market purchases. Things that the average retail investor either can’t do or won’t have the tools to do. We can try to mimic him, but there’s a reason why Buffett bets against hedge fund managers – he knows the odds of the most sophisticated managers repeating his success are EXTREMELY low.

      More importantly, if you want to get rich, don’y try to achieve that primarily through allocation your savings on a secondary market. Be an investor in the same sense that Buffett is. That means seeding capital and taking the risk of real ownership in something meaningful. It doesn’t mean allocating your savings to “own” 0.00001% of Proctor and Gamble. But even that is just one of the many lessons from understanding Buffett’s great success.

      • You might be thinking of his biggest gainers in dollar weighted terms, but a strong compounder who shifts into private equity and weird funding terms will eventually have his biggest dollars in those investments. Many Buffett’s biggest percentage contributors were indeed replicable by the average joe. WFC in the early 90s, ABC and WPO in the 70s (his directorship was a very minor piece of the bull thesis), AXP in the 60s, KO in the 80s. Except for the AXP purchase, the downsides seemed to be mitigated and hugely rewarded by potential upside.

  7. This article is unfair because it misses major contexts. For example, Warren Buffett fought in the Civil War. When he discusses value investing, he is simply referring to buying a lot for what he pays. His “value investing” pre-dates the shallow P/B, P/E, etc. matrices created for the masses by fund peddlers.

    Most of the other posts were clearly written by someone who only skims headlines. If you are one of the few who actually read the Buffett article on derivatives, he delves into characteristics of derivatives that may enhance risk. If you just read the headline, or stopped thinking at the WMD catchphrase, well, thank you for being a market participant.

    Points 3 and 5 are strange. Are there really people who believe that P/C insurance companies are leveraged mutual funds? I thought that nonsense was the basis of naive papers like the one by Frazzini, Kabiller, and Pedersen article. Float must be liability matched.

  8. If it’s that “easy” go ahead and do it. May be you can also post 7 ways of being Steve Jobs and Bill Gates. Actually here is another recommendation for you. How about you start writing a series like “blah for Dummies”, but you can call it “7 ways to do/become blah”. 7 ways to become nuclear engineer. 7 ways to build passenger jet. How about you start working and stop spending our time!

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