If you're looking for an investment strategy that pays off in the long term, it's hard to beat that of super-investor Warren Buffett. Buffett's company, Berkshire Hathaway(BRK.A), has a historical record of beating the S&P 500 Index. Its market capitalization as of October 2023 was over $763 billion.
Some believe that a hypothetical portfolio that mimics Berkshire's investments at the beginning of the month after they are publicly disclosed also earns a return over the S&P 500. You could try this coattail investing approach yourself.
But how do you find out what Berkshire Hathaway is invested in? Study the holdings listed in the company's Securities and Exchange Commission filingForm 13F.
This article will show you how to use Form 13F to build a portfolio like Buffett's.
Key Takeaways
- Coattail investing refers to following the same investing actions as an investor whose returns you'd like to capture.
- Berkshire Hathaway has a solid track record of outperforming the .
- Its market capitalization as of October 2023 was over $763 billion.
- SEC Form 13F lists the holdings of portfolios valued at $100 million or more that are managed by institutional investment managers.
- Every filed Form 13F is available to the public through the SEC's EDGAR database.
What Is Coattail Investing?
Coattail investing is the term investors use to describe the strategy of mimicking the trades of celebrity super-investors such as Warren Buffett, George Soros, John Paulson, and Carl Icahn. Of all the super-investors out there, Buffett is probably the one that most coattail investors follow, and for good reason. His picks have grown Berkshire Hathaway into the ultimate blue-chip company.
Passive vs. Coattail Investing
Many people like the idea of passive investing or a buy-and-hold strategy. With today's complicated financial markets, who wants to actively manage a portfolio? However, unless you're a financial whiz or willing to pay big bucks for one, your options are limited to mutual funds, ETFs or index funds, right? Wrong.
While mutual funds, ETFs and index funds can provide good gains, they come withfees. Also,if you're hoping to beat the market with these funds, don't count on it. Investments such as a spider exchange-traded fund (SPDR ETF) are never able to beat the S&P 500 because they track it.
So, how can you put your portfolio on autopilot with fewer fees and performance limitations? Consider riding the coattails of a successful investor.
Use Form 13F to Catch Buffett's Moves
You can't start mimicking Buffett's plays without knowing what they are. Believe it or not, those picks are accessible to everyone, thanks to the SEC.
Section 13(f) of the Securities and Exchange Act of 1934 states that all institutional investment managers who handle $100 million or more are required to file a list of their holdings each quarter.
This means that if you know where to look, you can access information about some of the best-managed portfolios in the world—for free.
One of the easiest ways to find Form 13F is to head to the SEC's Electronic Data Gathering, Analysis and Retrieval (EDGAR) site and search under a company name.
Here's an example of what some holdings from a company's 13F might look like:
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Source: EDGAR archives
Look for What Was Bought or Sold
So, how do you know what stocks were bought and sold during a specific period? That will require a little detective work.
Institutional investment managers only have to disclose holdings once per quarter. By looking for differences between a previous quarter's 13F and a current one, you can figure out what's new and what's been sold off.
Be careful when choosing your coattail picks. By the time you can access a list of Buffett's investments, the investing situation may have changed and you might have lost your chance to get in early on a value investment. And once you know Buffett's choices, you still need to perform your own due diligence to see if the stocks fit your risk profile.
4 Tips for Your Coattail Portfolio
If you have an existing portfolio, consider creating a separate Baby Berkshire portfolio. That can be smart since other investments in the same portfolio potentially could affect allocations, risk potential, and returns.
1. Allocate Your Shares Properly
You probably won't be able to buy the same number of shares that Buffett's multi-billion dollar portfolio buys. Yet, you'll want to match its allocation. To do so, search Form 13F for the percentage each holding represents. Then, apply those to your own portfolio on a smaller scale.
2. Update Your Portfolio
After you've created your Buffett coattail portfolio, don't forget to update it. While Warren Buffett is known for his buy-and-hold philosophy, don't think that he continues to hold stocks that aren't performing. If you fail to take a look at Berkshire's 13F every once in a while, you could miss out on a great exit point.
3. Take a Page From the Pros
Don't be afraid to make an entire portfolio out of Buffett's picks. While putting all of your eggs in one basket is usually inadvisable, the Berkshire portfolio is made up of large-cap, long-term holdings. In other words, they are stocks that may be less volatile than your current investments. Plus, they're already appropriately allocated.
4. Beware of Fees
Berkshire Hathaway has so much money that it doesn't hesitate to make necessary small changes in the number of shares it owns in any given stock from month-to-month.
Since your portfolio probably isn't as big as Buffett's, brokerage fees (e.g., commissions) may prohibit you from matching Berkshire's allocation exactly.
As a general rule, if the company unloads or buys into more than 10%-15%of the portfolio's value, you might want to make a trade, too. Remember, though, that the smaller your portfolio's value is, the larger those changes will have to be to make a noteworthy profit. Think before you trade.
More Ways to Trade on Buffett's Know-How
Throughout his many decades of investing, Warren Buffett has shared investing wisdom gained from experience.
Here are a few of Buffett's ideas to consider as you build and maintain your own portfolio over time.
Invest in What You Know
Select, research, and buy stock of companies whose business you can understand. Make sure that you comprehend how a company operates, the way it makes money, how it invests for growth, and its prospects for the future. Avoid shares of those companies that are in an industry or sector with which you are unfamiliar.
Focus on the Business, Not the Stock
Take on the mindset of buying a business rather than stock. Look beyond chart formations and hot tips from family or friends. Focus on how the business can generate revenue, growth, and solid returns because that will drive the price of the stock.
Buy Value and Quality
Like Buffett, you can be a value investor who looks to buy stock at less than a high quality company's intrinsic value. So, calculating intrinsic value and understanding a company's fundamentals can be key to your investing success over time. Always try to buy quality stocks at reasonable prices.
Buffett's 1989 letter to Berkshire Hathaway shareholders contained a memorable quotation that supports this approach: "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price."
Commit to the Long Term
Look beyond the short-term fluctuations in the prices of stocks that you own. With experience, investors typically come to understand that the market constantly goes up and down for various reasons. If you exit with every downturn only to reenter later, the costs of transactions and lost opportunity will impact your portfolio's return.
Generally speaking, Buffett feels that if you believe in the future of American business, then buy and stick with your positions when the market going gets rough (unless you have an established close-out strategy) so you can ride the subsequent wave back up without having reduced your return potential.
Ignore Market Noise
It can be difficult for some investors who monitor market and company news on a daily basis to avoid getting caught up in screaming headlines and excited talking heads. Often, this can result in a flurry of transactions, with investors closing out positions or initiating new ones without properly considering their actions.
When the market turns around, these investors can lose out because they let emotions take over common sense. As with the previous advice above, Buffett recommends that you commit to the long term and avoid the headlines.
Who Is Warren Buffett?
Warren Buffett is the CEO and co-chair of Berkshire Hathaway Inc. He's world-renowned for his approach to investing and his investing results. He's also one of the wealthiest individuals on the globe. Thanks to his stewardship of Berkshire Hathaway, his shareholders have become wealthy, as well. In January 2023, a single share of Class A stock in the company was valued at $465,040.
What Is Form 13F?
SEC Form 13F is a document that must be completed and filed quarterly with the SEC by institutional investment managers overseeing $100 million or more in assets. Its purpose is to support the public's confidence in the financial markets by allowing anyone to see the actual holdings of the country's large investment portfolios.
Why Can't an S&P 500 Index Fund Outperform the Market?
The reason an S&P 500 index fund cannot outperform the general market (represented by the S&P 500 index) is because the fund contains exactly the same stocks that the index follows and measures. It can only return a similar value. Moreover, fees that investors pay to own the index fund will diminish their returns to some degree so that, essentially, the return is slightly less than that measured by the index.
The Bottom Line
Warren Buffett has shown us that, over time, he's a tough investor to beat. So, you know what they say, if you can't beat 'em, join 'em. If you decide that building your own Berkshire Hathaway portfolio is right for you, then you'll be glad to know that finding and evaluating the Oracle of Omaha's picks has never been easier.
