Why can't we just copy a successful portfolio

The portfolio of Warren Buffet owned Berkshire Hathaway has always been public. Why then we don't have millions of Warren Buffets around us? Copying a portfolio just doesn't work. Read why...

Background

When I was in college, I used to study very hard. I used to sit in the college library after the classes got over, for a detailed understanding of the topics covered during the day. I often referred multiple books by different authors on the same topic, and prepare my own notes that were a true representation of the topic. 

Those notes were like a bible for me, since they were good enough to be referred at any later point of time, or before the examinations. It made everything so simple. I need not refer anything else - no reference books, professor views etc, and just my notes. 

There were many students in my batch who used to come to me, a fortnight before the exams, and ask my notes to be photocopied. I used to give it to them without any hesitation, though some of my well meaning close friends wanted me not to do so. My friends believed that those guys, who are not even my friends, are enjoying a free lunch. they believed that I did all the hard work, and that should stay only with me. I never understood how it would truly help them in life. It actually never did. It never does. Copying never helps.

Berkshire Hathaway's Portfolio

Here is a link to the portfolio of Berkshire Hathaway. For those who are looking at it for the first time, it might be an interesting read:

https://www.cnbc.com/berkshire-hathaway-portfolio/

Do you want to copy it and get rich? Well, you can try that, but you are quite unlikely to succeed. Well, you may point out that its not just his portfolio but compounding as well, that has been a contributor to Buffet's wealth, and I would agree. But even if you discount compounding, this idea of copying rarely works. 

The idea of copying successful portfolios

I am sure that the idea of copying successful portfolios must have crossed your mind at some stage of your investing journey. And it is not just about Berkshire Hathaway's Portfolio. There are so many freedom seekers who have similar queries. One of my freedom seekers on our ELITE Program recently asked me this query over email:

How about I follow the best performing mutual funds in each category, carefully read their stock lists and start following their investment as per the weight assigned and create my own portfolio on that basis? Is that recommended?

Interesting question, isn't it? But only as long as you do not get deeper into it.

Four reasons why copying rarely works

1/ Context

Every stock in any portfolio, or a fund, is because there is a context and a reason for the stock to be there. We don't know that context. The reason for a specific stock may very well not be returns. It may be needs of liquidity, short term investing, to balance the portfolio, or just invested to try something new. We just don't know.

2/ Risk Profile

Everyone's risk profile is different. We don't know the risk profile of the fund (or the mandate of the fund), the risk profile of the fund manager, or that of the investor whom we are trying to copy. And our risk profile may be vastly different from them. Risk Profile defines how we behave during testing times.

If the investment does not match our risk profile, we will never have the required conviction during the testing times of the market, and surely, the markets will test the best of investors. In the absence of such conviction, we are likely to take irrational decisions when put under pressure by the market.

3/ Return Expectations

We all expect different returns from our portfolio and get satisfied at different levels. We will start to get unnerved when returns get too high or too low from our expectations. We may be expecting 20% returns from the stock but the investor whom we are copying may be expecting just 10%, since he or she may be expecting better returns somewhere else. All you know, the investor may have targeted only 10% this year for so many reasons.

4/ Vision of an Investment

Everyone's understanding of why the investment is being done, and for how long it needs to be kept, can be very different. An investor (or the fund manager) may feel that he is ok with zero returns for next 15 years and a decent return after that. The other investor, who just copied, may quit in the first 10 years - seeing no returns, because he doesn't have the complete picture, and may feel that the investment was a mistake.

Summary

Copying just doesn't work. Observing and understanding the complete picture does. Copying investments is like copying the answer sheet of a class topper without realizing that the paper sets were entirely different.

There are no short cuts to success, and personal finance is no exception.

Regards

Manoj Arora
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