Berkshire Hathaway Chairman and CEO Warren Buffett speaks during an interview in Omaha, Neb., Monday, May 7, 2018, with Liz Claman on Fox Business Network's "Countdown to the Closing Bell". (AP Photo/Nati Harnik)
JOHANNESBURG - Say you ran a poll asking participants to nominate their choice as the greatest investor of the last 20, 50 or 100 years - it would be quite a shock if the name at the top of the list turned out to be anyone other than Warren Buffett.

That being so, then why do more people not try to mimic the investment approach of the “Sage of Omaha” buying whatever he owns in his portfolio?

In answering this question, we can point to some practical difficulties in trying to clone a Buffett portfolio and these are echoed in US investor Meb Faber’s 2016 blog post, which also argues that this is easier said than done.

One immediate plus, Faber notes, is that mirroring Buffett would be cheap because he operates a very low portfolio turnover - that is to say, he does not buy and sell stocks very often.

The challenge is sticking to your style

“So why don’t people simply follow along and ride his coat-tails?” asks Faber. “Because it’s hard,” he explains, adding that Buffett is successful not because he has “a magic stock wand” but rather an “unbelievable ability to stick to his style”.

“The challenge,” Faber goes on, “is sticking to your style and not selling at the worst time.”

To underline his point, he shows that a clone Buffett portfolio outperformed the US market by an average of 4percent a year between 2000 and 2015 - enough to beat 98percent of all US unit trusts.

And yet, as Faber also points out, the clone portfolio underperformed the market in nine of the 16 years in the sample, including every year since 2012.

Value has had a tough decade

That is largely a result of value (the art of buying stocks which trade at a significant discount to their intrinsic value) as an investment style having underperformed for much of the past decade.

And while Buffett’s approach to investing is arguably not as “pure value” as it once was, this is still the person the market recognises as the benchmark for the discipline.

So, wonders Faber, at what point might you have fired the manager of your clone portfolio?

Copying Buffet is ‘boring’

The other reason investors might not wish to mirror Buffett, Faber suggests, is that it would actually be “boring” - after all, he tends to steer clear of the sort of stocks that are permanent fixtures in the media headlines, such as Facebook, Amazon and “exciting” biotechnology businesses.

What is more, as mentioned earlier, Buffett does not trade portfolio positions very often.

It is perhaps then key to consider that when there are fewer attractive assets to buy, value investors buy fewer assets.

Still, whatever holds for value investors in that respect goes for Buffett in spades.

A shift to cash

In his most recent letter to the shareholders of his investment vehicle Berkshire Hathaway, Buffett revealed that the amount of the portfolio held in cash or “short-dated” (that is, more easily liquidated) US government bonds, had risen from $86.4bn in February 2016 to $116bn now. To put that in some sort of context, that equates roughly to a shift from Sri Lanka’s current total gross domestic product to that of Kuwait.

Or, if you prefer, a move from holding the entire market capitalisation of Starbucks to that of BP - with a billion or two to spare for a cup of coffee or a full tank of petrol.

“This extraordinary liquidity earns only a pittance and is far beyond the level Charlie (Munger, his vice-chairperson) and I wish,” Buffett writes.

“Our smiles will broaden when we have redeployed Berkshire’s excess funds into more productive assets.”

As things stand, however, one of the greatest investors of all time and a real advocate of value investing can identify so few attractively priced businesses to buy, or buy into, that he is keeping 60 percent of his portfolio in cash or equivalent assets.

What does that tell you about asset valuations?

Nick Kirrage is the equity value portfolio manager at Schroders. Schroders will be participating in the Allan Gray Investment Summit in Johannesburg and Cape Town in July. 

The views expressed here are not necessarily those of Independent Media.

- BUSINESS REPORT