Why we can’t copy Warren Buffett

Warren Buffett is the only genuine household name in investment. Even people who've never once glanced at the financial pages know about the genial, folksy, Coke-swilling guru from Omaha, and the countless ordinary Americans who have become multi-millionaires by being early investors in his Berkshire Hathaway investment vehicle. So it's little wonder his every move is pored over.

Now Buffett has invested in Canadian mortgage lender Home Capital Group (HCG). HCG ran into trouble because it uncovered a problem with widespread mortgage fraud but took too long to tell shareholders about it (as far as the regulator is concerned). This in turn almost triggered a Northern Rock-style run on the lender. The share price plunged from more than C$30 to as low as C$6, then recovered to around C$15 after a Canadian pension fund provided a temporary lifeline.

Last week, Buffett stepped in, and the price leaped above C$18. "Ah," you might think. "Buffett has bought a distressed stock. It must be turnaround time. Should I copy him?"

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Sadly not. You can't copy Buffett because only Buffet can get the deal he's getting. In exchange for giving Home Capital a C$2bn overdraft he has the chance to buy C$400m of the shares (almost 40% of the company) at around C$10 a share a 33% discount to the public share price just before the deal was announced. That's on top of the interest he'll make on the loan. That makes it a very different deal to the options open to the ordinary investor. It isn't the first such deal Buffett has done.

A week after Lehman Brothers went bust in September 2008, Buffett invested $5bn in Goldman Sachs. As Stephen Gandel notes on Bloomberg, five years later, an ordinary investor in Goldman had made just 17.5%. Buffett had made 67%, partly because Goldman had given him preferred stock paying 10% a year.

The truth is that Buffett isn't just a value investor, or a quality investor. His real skill lies in grasping what his investment edge is at any point. When you manage millions, you can have an edge in obscure small caps. When you manage billions, you might have an edge in quality large caps instead (similar to Nick Train or Terry Smith in the UK). Buffett's edge is his reputation and his vast pool of liquidity.

When no one else can lend you money, Buffett can bail you out as long as you can pay up for his stamp of approval. You can't copy Buffett's style, but you can work out whether you have some sort of edge. And if you don't, then you can still follow Buffett's advice save regularly into cheap index funds, and put your time to more profitable use than fretting over the market's ups and downs.