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Do you Really Want to Invest Like Warren Buffett?
These days it seems that buy and hold investing doesn't work as well as it once did. In response many buy and hold advocates like to point to the success of some of the famous value investors. The most famous and the most successful of the value investors is Warren Buffett.
How have Warren Buffett’s investments been faring these days? Everyone knows that he's seen investment returns of over 20 to 30% per year since he started investing, depending on which period of time you look at this performance. Most of us would be quite happy getting those returns.
Now to be fair, Warren Buffett does have a few advantages. He doesn't invest in stocks, he invests in companies. His practice is to buy a significant stake in the company, and he gets final say in who is the CEO of the company, and gets representation on the board of the company. Most average investors don’t worry about choosing board members or who they want as CEO.
Given those advantages, it's fair to ask how well he's done in more recent times. A lot of Buffett’s reputation is based on history stretching back to the 1960's. How has the "Oracle of Omaha" and his buy and hold methodology fared in more recent times?
The most direct way to gauge that would be to take a look at the Berkshire Hathaway stock price, since that's the holding company for the collection of companies that he owns. The Class A shares had become infamous for being one of the most expensive stocks on the planet (trading recently at over 0,000 a share) but several years back they introduced the Class B shares for mere mortals, trading recently over 00 a share. So, you can invest like Warren Buffett, taking advantage of his inside track by simply holding BRK Class B shares.
After the Class B shares started trading, they initially went up just like you would hope:
1997 up 38.4% 1998 up 52.7%
But, then things began to change
1999 down 22.1% 2000 up 28.6% 2001 up 7.3% 2002 down 4.0% 2003 up 16.2% 2004 up 4.3% 2005 up 0.0%
For the 7 years from 1999 to 2005, HRK.B was up 41%, a compounded annual growth of about 5%, slightly better than a money market fund. However, that did outperform the S&P 500, beating the index fund holders.
If those results are not that attractive to you, or if it just looks too much like your own portfolio, what other alternatives do you have?
The top ranked advisory services in Hulbert Financial Digest over the last several have many advisory services that use a relative strength or sector rotation approach to investing, specifically using mutual funds. Choosing the top mutual funds and rotating on a periodic basis has been a successful approach for a long time. However, as mutual funds introduce Early Redemption Fees (ERF’s) that approach has become much more difficult, as it eliminates many of the previously top rated funds from use in a rotation strategy.
Two ways exist to get around this limitation:
1) The Fidelity Select Mutual Fund family still allows trading after a minimum holding period of just 30 days, and with over 40 funds offers the diversity to effectively use a sector rotation strategy. Many investment newsletters have a long history successfully trading the Fidelity Select Fund family. In addition, most of the other Fidelity mutual funds still have no ERF if held for 90 days.
2) Exchange Traded Funds (ETF’s) offer most of the same diversity of offerings, and can be traded at any time without a redemption fee, as they are bought and sold just like stocks. While exchange traded funds have not been offered nearly as long as the Fidelity mutual funds, so there is not as much history on systems using ETF’s, many successful investment newsletters are starting to offer systems using ETF’s as a successful substitute for sector mutual funds.
About the Author: John Ruppel writes for Fundztrader.com. Fundztrader offers model portfolios featuring Fidelity Mutual Funds, Fidelity Select Mutual Funds, and Exchange Traded Funds. More information and a free newsletter are available at http://www.fundztrader.com
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