Warren Buffett has bought a few weeks ago all the remaining shares of the Burlington Northern Santa Fe Railroad that it did not already own. As we could expect, stocks of others public listed railroads have gone up in the days following that acquisition. It was the third time that the sector has appreciated following a significant investment from the oracle of Omaha. This phenomenon is easily understandable because Buffett is probably the most watched and imitated investor in the world. After all, if railroads are a good investment for Buffett, why shouldn’t they be for you and me?
Well, maybe because we are in a much different financial position than Buffett! With tens of billions to invest, the universe of potential investments who may have a significant impact on its net worth is necessarily very limited. This universe is primarily composed of mature companies with small-to-modest growth potential. Buffett’s objective is likely to earn a 10 to 15% annual yield while taking minimal risks. The limited growth potential of these stocks makes it necessary to pay special attention to the price paid. Buying those after Berkshire’s CEO often involves paying a premium that only decreases the yield that one can expect from its investment.
Should we conclude that it is useless for someone looking to make big money in the stock market to try to emulate Warren Buffett? No! The Buffett followers have chosen the right man. They have simply chosen the wrong era. This is not the Buffett of 2009 we should try to emulate but rather the one of 1955! Here is an excerpt from his biography (The Snowball, p. 194) that demonstrate that its investment targets at this time were very different from today:
One of his favorite sources of ideas was the Pink Sheets, a weekly printed on pink paper, which gave information about stocks of companies so small that they were not traded on a stock exchange. Another was the National Quotation book, which came out only every six months and described stocks of companies so minuscule that they never made it into the Pink Sheets. No company was too small, no detail too obscure, to pass through his sieve.
You must do something different from the average person in order to achieve above average results. Buffett has realized that long ago. Of course, investing in obscure small cap stocks involves a lot of research and is not for everyone. Building a portfolio of solid blue chips is still probably the most sensible approach for most people. However, we should not delude ourselves and imagine that we are walking in the footsteps of the oracle of Omaha. If he was in our shoes, it’s not in the Pfizer and Johnson & Johnson of this world that Buffett would invest …
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