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 Index.
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.
- 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 S&P 500.
- Its market capitalization as of June 2022 was over $687 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.
Warren Buffett: InvestoTrivia Part 2
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? 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 with fees. 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 or performance limitations? Consider riding 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 such as Warren Buffett, George Soros, John Paulson, and 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.
How to Read 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 13F might look like:
Source: EDGAR archives
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. 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
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.
Since other investments in the same portfolio potentially could affect allocations, risk potential, and returns, consider creating a Baby Berkshire portfolio that's separate from your existing one.
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.
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 June 2022, a single share of Class A stock in the company was valued at $472,710.
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.