Why Mutual Funds Can’t Copy Warren Buffett

There are countless number of “value” mutual funds trying to replicate some form of what Warren Buffett does by purchasing companies well below their intrinsic value.  I’ve stated many times that Warren Buffett does nothing like what the rest of us do when we’re picking stocks because he’s essentially running a firm that is part insurance, part holding company, part hedge fund and part private equity firm.   But that’s not the only thing that differentiates Buffett’s firm and strategy from the rest of the investment management business. As Robert Huebscher explains in this piece on Advisor Perspective Buffett also isn’t dealing with a lot of the constraints that impede an open-end mutual fund:

“Buffett is not constrained by the burdens of an open-ended mutual fund. He is not concerned with short-term performance and the effect it might have on asset flows, nor with being measured against a benchmark or having his returns compared to a peer group. He doesn’t have to deal with daily redemptions. He isn’t concerned with how Morningstar rates his fund, and his revenue model is not based on assets under management.”

That’s exactly right.  Again, it’s about how Buffett has constructed his own portfolio process.  An important feature of that is removing all the constraints of traditional asset management and differentiating the business model.

The bottom line: be mindful of people selling their “invest like Buffett” strategy.  The odds are, they’re not doing anything remotely close to what Buffett does.

Related:

• The Great Lesson from Warren Buffett
• The Contradictions of Warren Buffett