Join our community of smart investors
OPINION

Don't be a wannabe Warren

Don't be a wannabe Warren
December 14, 2012
Don't be a wannabe Warren

Thousands of these 'average investors' continue to buy into the Buffett dream, though, despite warnings like this from Cullen Roche, who writes for the influential US blog Pragmatic Capital. There are hundreds of websites and books that will tell you the exact opposite, including no fewer than 1,800 on Amazon referencing the veteran investor. A new one - "Tap Dancing to Work" - landed on my desk only last week. Already it's number one on the e-tailer's business and investment section. Buffettism has become an industry in its own right, if not yet a fully-fledged philosophy.

It's obvious why investors want to believe they can be just like the Sage of Omaha. His fabulous wealth aside, he seems just like them, famously shunning the trappings of wealth and staying firmly put in middle-America. "To the average investor Buffett is a folksy frugal regular old chum who just has a knack for picking stocks. You know, he just picks those 'value stocks' and lets them run, right?", says Mr Roche.

Except that, he says, the myth is a little different to the reality. Far from being the antithesis to Wall Street, Buffett, argues Mr Roche and others, is one of its own. His first fortune was made running what in certain respects was a hedge fund - admittedly a long-only, value-led hedge fund, and one which only took a cut once its investors a 6 per cent profit (which, impressively, he did for years). But a hedge fund nevertheless, employing many of the tricks and turns so vilified by those outside of this black box industry. Having made his first fortune, he then ploughed the proceeds into undervalued insurance companies via Berkshire Hathaway. It was undoubtedly his shrewdest move, bringing an enormous pool of capital to fund his investments that could be leveraged further still.

Not many private investors have that luxury. And not many 'mom and pop' investors have the influence or access to structure the kind of deals Mr Buffett makes, either, whether it be buying preference shares in Goldman Sachs or "cash settled equity swaps" in Tesco. So by all means pay attention to the many pearls of investing wisdom to be found in his annual letter to shareholders, but don't think you can be another Buffett.

Maybe, then, it's time to find another hero - and we think we've found one in Seth Klarman. He's a hedge fund manager, too, but don't let that soubriquet put you off. Like Buffett he's more value manager than hedgie, and unlike some hedge funds he doesn't use leverage. His approach is a simple one that we think, unlike Buffett's, investors can replicate. Find out how in this week's lead feature.