Why Copying Warren Buffett’s Trades Won't Always Be Profitable

Berkshire Hathaway (BRK.B) chair Warren Buffett, who turned 94 late last month, is among the best investors of all time, with a massive global fan following. Several investors follow his investing moves, which are publicly disclosed via quarterly 13F filings. But is following the legendary value investor's every move really a profitable strategy? We’ll discuss in this article.

To begin with, Berkshire’s long-term returns under Buffett’s leadership are bound to leave us in awe. The shares have risen at a CAGR of 19.8% between 1965 and 2023, which is nearly twice what the S&P 500 Index ($SPX) (with dividends) has delivered over the period.

While there have been intermittent periods of underperformance, the stock’s long-term returns look stellar, and it recently became the eighth U.S. company – and the first non-tech name – to command a market cap of $1 trillion.

Investors have flocked to buy shares of the conglomerate, whose YTD gains of over 34% are over twice what the S&P 500 Index has delivered over the period, but the “Oracle of Omaha” himself repurchased only $345 million worth of Berkshire shares in Q2. The buyback amount was the lowest since Q2 of 2018, when Berkshire made no repurchases.

Not All of Warren Buffett's Moves Are Profitable

Like the toned-down Q2 buybacks, not all of Warren Buffett's investing moves are profitable – at least, not in the short term. To be sure, one of Buffett's hallmarks has been humility, and he has admitted to making many mistakes. For instance, he acknowledged that not buying Alphabet (GOOG) and Amazon (AMZN) early was a mistake. The investing legend has also acknowledged that selling his stake in Disney(DIS) was a mistake. Buffett also said that he overpaid for Kraft during the merger with Heinz. Kraft-Heinz (KHC), which is among Berkshire Hathaway’s top 10 holdings, has been a long-term underperformer.

On a similar note, he admitted that Berkshire “paid too much” for Precision Castparts, which was the biggest acquisition in the company’s history. Buffett’s mistakes are bound to be costly, given the conglomerate’s mammoth size, and Berkshire wrote down Precision Castparts’ value by nearly $10 billion in 2020.

Buffett previously admitted that he erred in selling Apple(AAPL) shares, but Berkshire has been gradually selling Apple shares in 2024 as well, cutting the stake by nearly half in Q2.

Selling Airline Shares in 2020 Was Also Probably a Mistake by Buffett

Berkshire held significant stakes in four top U.S. airline companies during the early days of the COVID-19 pandemic. However, Buffett sold the shares at a massive loss in Q1 2020 – a decision that was hard to comprehend for even his fans, as he is known to be “greedy when others are fearful.” Though it might sound counterintuitive, Buffett said that he erred in investing in airline companies while justifying his decision to sell them.

Last year, Buffett sold General Motors (GM) stock, which again looks like a mistake. While the old saying goes “hindsight is the best sight,” to me, selling GM stock last year and airline stocks in early 2020 look like decisions that were mistakes at first sight.

Warren Buffett’s Cash Calls Have Also Not Gone Right

Warren Buffett’s cash calls haven’t been spot-on, either. The nonagenarian has been a net seller (i.e., more sells than buys) of stocks for 7 straight quarters while markets have soared to multiple record highs over the period. The stock sales, coupled with Berkshire’s organic cash flows, helped lift the company’s cash pile to a record high of $277 billion at the end of June.

Notably, the last time Buffett was so aggressive about his stock sales was between 2020 and 2021, when he was a net seller of stocks in both years. The S&P 500 Index delivered double-digit returns in both years, which means Buffett's cash call went wrong.

Following Any Fund Manager Blindly Might Not Be a Good Strategy

Buffett will go down in history as one of the best investors of all time, and his teachings will keep on guiding generations to come. However, following any fund manager blindly might not always be the best strategy, as their public disclosures don’t usually tell the complete story.

For instance, while Buffett has been on overdrive in selling Apple shares, he has indicated that he is doing so for tax reasons. Berkshire made billions of dollars in capital gains on its Apple investment, and will need to pay taxes at a higher rate if U.S. capital gains taxes rise. Similarly, Buffett has admitted that given Berkshire's mammoth stake in Kraft-Heinz, it is not possible for the company to easily sell the stock and reverse his mistake. Most investors don't have this dilemma, and can exit bad bets at will.

Also, while Buffett takes a conservative approach and stays away from tech names, among others, investors should make investment decisions based on their own individual risk-return appetite. Buffett has stayed within his “circle of competence” and given tech names a miss. To his credit, Berkshire’s performance has been reasonably good over the last decade despite its portfolio being underweight on tech, which is the best-performing sector over the period.

All of that said, Buffett has delivered returns like a “growth stock” while managing Berkshire as a conservative and value enterprise. Doing so consistently over decades without taking undue risk is what makes him an investing legend.