Famous investor Warren Buffett has had a very successful career buying shares. His company Berkshire Hathaway has to publish details of its holdings. So I can copy some of the Sage of Omaha’s moves and buy Warren Buffett shares for my ISA. But should I?
Price drives value
The long-term value of a share usually relies on two things. One is the long-term performance of the business. The other is the price I pay for my shares.
As an example, consider a share my colleague buys when it trades at £10. Once it reaches £100, I am discussing with him the company’s great business outlook and long-term prospects. I buy. A few years later, the company gets taken over at £200 per share.
I have done well in this example – doubling my money in a few years. But my colleague saw his money increase 20 times, a much bigger return than mine. We are both invested in the same business – the only difference is the price we paid per share. Sometimes the results can be worse than this – by overpaying for a share, I can lose money even if I have correctly identified the positive business trends at the company.
Warren Buffett shares such as American Express and Coca-Cola have been in his portfolio for decades. He bought them when they were much cheaper than today. Maybe buying those shares for my ISA today could still help me profit – but I will not get the returns of a shareholder who bought at a cheaper price, such as Buffett. In assessing their valuation, I need to consider their price if I buy them today.
My circle of competence
Buffett himself admits that he has made mistakes in his investing career. Some of them have been very costly. Warren Buffett buys shares based on his own circle of competence. That equips him to assess their commercial prospects.
I do the same when buying shares for my ISA. Some Warren Buffett shares fall within my circle of competence, so I would feel comfortable assessing whether they could be an attractive addition to my portfolio.
But others shares owned by the Oracle of Omaha operate businesses well outside of the space in which I could make a reasonable assessment of them. For example, Asian holdings BYD and Mitsui are not shares I feel equipped to judge. Buffett may feel he can. But I do not, so I would not even consider holding them in my portfolio.
Warren Buffett technique over Warren Buffett shares
While I would consider holding some shares Buffett owns in my portfolio, I think the better approach for me is simply to apply his investment techniques when making my own choices.
That opens up a far wider pool of shares I could consider for my ISA, especially among UK companies. By applying his investment principles, I may still decide some shares Buffett owns are right for my ISA. But I can also hopefully identify shares that fall within my own circle of competence.