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Can you invest like Warren Buffett? I reckon I can beat him

Once again when talking to friends about stock market investing and the power of choosing our own shares, I’ve been met with shaking of heads, and comments about how we small investors can’t possibly beat the fat cats.

My first thought was that we actually don’t need to, and that if we can manage a modest return of 5% to 6% per year we should do plenty well enough over the years — and I think that’s a modest target that many should be able to beat. But my second though was “yes, we can!

Advantage

Something Warren Buffett recently said brought home to me that we have a significant advantage over the big investors, and that’s our relative poverty. While the enormous success of Warren Buffett and his Berkshire Hathaway investment firm is legendary, the richer you get the harder it becomes.

Mr Buffett once suggested that you should only buy shares in a company if you’d be happy to own the whole company. I understand what he means, but I don’t think like that. If, for example, I had the £4.5bn it would take to buy the whole of ITV (assuming I could actually buy it at the current market price), would I do so?

No, not a chance. I’d put the cash into a more diversified portfolio. Warren Buffet also said “diversification is protection against ignorance. It makes little sense if you know what you are doing.” But I am ignorant of many things, and I’m never 100% sure I know what I’m doing. So I diversify, but I still think ITV is one of the hottest picks on my stock watchlist.

What did he say?

What was it I meant about something Mr Buffett said recently? I’m getting to it, and it’s related to buying the whole company. At this year’s annual Berkshire Hathaway shareholders’ meeting, he saidwe’re hoping for a deal in the UK and/or in Europe, no matter how Brexit comes out,” speaking of his desire for “a very large acquisition in the UK.

And that’s the thing. Warren Buffett needs to seek investments measured in billions of dollars if he’s to make any significant difference to Berkshire’s bottom line.

Buying shares in a small-cap growth opportunity? Even if he could invest a couple of million, it would be of little benefit to him. If it doubled or trebled in a couple of years, it would still hardly make a dent in Berkshire’s market capitalisation of nearly $500bn.

As for investments at my level, there are far more opportunities out there for investors who have mere thousands to invest than for the big cats to whom that level would be pointless.

Beating the rest

We have an advantage over big institutional investors too, in that we’re not answerable to anyone other than ourselves, and we don’t have to satisfy anyone with regular quarterly updates. Looking good and holding popular shares can make a big difference when you need to show regular short-term progress, and that can lead to over-trading, higher costs, and poorer long-term performance.

I reckon those, then, are our two big advantages — we can profit from much smaller investments, and by buying long-term shares we can target dependable performance while keeping costs down.

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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Berkshire Hathaway (B shares). The Motley Fool UK has recommended ITV. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.