If you're looking for an investment strategy that pays off in the long term, it's hard to beat the strategy of super-investor Warren Buffett. Buffett's company, Berkshire Hathaway (BRK.A), has a historical record of beating the S&P 500. Some studies show that a hypothetical portfolio that mimics Berkshire's investments at the beginning of the following month after they are publicly disclosed also earns a return over the S&P 500 Index.
Want some of that action? This article will show you how to use the Securities and Exchange Commission filing Form 13F to build a fund like Buffett.
What Is Coattail Investing?
Most 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? But, unless you're a financial whiz or willing to pay big bucks to a financial whiz, your options are reduced to mutual funds, ETFs or index funds, right? Wrong.
While mutual funds, ETFs and index funds can provide good gains, they come at a cost — fees. Also, if you're hoping to beat the market, don't count on it. Investments like 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 without fees or performance limitations? Why not ride the coattails of a successful investor?
Coattail investing is the term investors use to describe the strategy of mimicking the trades of celebrity super-investors like Warren Buffett, George Soros, John Paulson or Carl Icahn. Of all the super-investors out there, most coattail investors probably follow Warren Buffett, and for good reason — his picks have grown Berkshire Hathaway into the ultimate blue-chip company.
Warren Buffett: InvestoTrivia Part 2
How to Read Form 13F to Catch Buffett's Moves
You can't start mimicking Buffett's plays without knowing what they are. But believe it or not, those picks are accessible to everyone thanks to the SEC. The Securities and Exchange Act of 1934 states that all institutional investment managers who handle more than $100 million are required to file their holdings each quarter. This means that if you know where to look, you can have access to some of the best-managed portfolios in the world — for free.
One of the easiest ways to find a 13F is by heading to the SEC's Electronic Data Gathering, Analysis and Retrieval (EDGAR) site and doing a search under the company name.
Here's an example of what some holdings from a 13F might look like:
Source: EDGAR archives
Note: Be careful when choosing your coattail picks. By the time you have access to Buffett's investment knowledge, the investing situation may have changed and you might have lost your chance to get in early on a value investment. Once you have a list of Buffett's choices, you still need to perform your own due diligence on the stocks to see if they fit your risk profile.
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, so by looking for differences between the previous quarter's 13F and the current one, you can figure out what's new and what's been sold off.
Four Tips for Your Coattail Portfolio
1. Allocate Your Shares Properly
Since you won't be able to buy the same number of shares Buffett's multi-billion dollar portfolio invests in, one way to make sure you're allocating the same as Berkshire is by figuring out what percentage each holding makes up, and applying it to your own brokerage account. (All of that information can again be found in the 13F.)
2. Update Your Portfolio
After you've created your Buffett coattail portfolio, one mistake you don't want to make is to forget about updating it. While Warren Buffett is known for his buy-and-hold philosophy, don't think that he never unloads stocks that aren't performing. If you don't take a look at Berkshire's 13F every once in a while, you could be missing out on a great exit point.
3. Take a Page From the Pros
Don't be afraid to make your 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, the stocks you'd be investing in are probably less volatile than what's already in your portfolio, and already appropriately allocated.
4. Beware of Fees
Since Berkshire Hathaway has so much money, it may make small changes in the number of shares it owns in any given stock from month-to-month. Since your portfolio is not as big as Buffett's fund, brokerage fees (like commissions) will probably get in the way of staying allocated exactly like Berkshire.
As a general rule, if the fund unloads or buys into more than 10-15 percent of the portfolio's value, you might want to make a trade, too. Remember, though, the smaller your portfolio's value is, the larger those changes will have to be for you to make a profit. Think before you trade.
The Bottom Line
Warren Buffett has shown us that, over time, he's a tough investor to beat. And you know what they say: if you can't beat 'em, join 'em. If you decide that building your own Berkshire fund is right for you, then finding and evaluating the Oracle of Omaha's picks has never been easier.