Why You Can’t Invest Like Warren Buffett

He gets a better deal than you do.

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Warren Buffett is renowned as America’s best investor. He’s a grandfatherly guy who lives in a modest house in Omaha, Neb. and only invests in everyday companies that he can understand. He is friends with Bill Gates, but never invested in Microsoft or any other Internet company.

Buffett’s technique is simple. He finds a good company, invests at a bargain price, and then rides the company to greater success. He’s made millions in Coca Cola, American Express, Wells Fargo, and the Washington Post. And he makes it look so easy that anyone could do it. But it’s extremely unlikely that you will be able to match Buffett’s level of success, even if you pick the same investments he does.

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Back in 2008, during the height of the financial crisis, Warren Buffet made a highly publicized investment in the Wall Street firm Goldman Sachs. Buffett was buying when everyone else was panicking, and as a result many experts thought he was getting into a top company at a discount price.

You, too, could have invested in Goldman Sachs in 2008. But here’s the difference between you and Buffett. If you had an extra $12,000, you could have purchased 100 shares of Goldman common stock at $120 a share. Considering that Goldman had been worth over $200 a share the year before, you might have thought you were getting a pretty good discount. You also would be receiving the Goldman dividend of $1.40 a share, a rate of just over 1 percent.

But Buffett had more than $12,000 to invest. He had $5 billion. So he negotiated a much better deal. He bought preferred stock that came with a special dividend. Instead of 1 percent, he negotiated a 10 percent dividend. So now every year he receives a check for $500 million. Then, only after he gets paid, do common stockholders get their paltry 1 percent.

[See A Simple Way to Add $100,000 to Your 401(k).]

So now, three years later, how have we done? Goldman is selling at roughly $110 a share, slightly below its 2008 price. If you had invested with Buffett, you would have lost about $1,000. Buffett’s lost some capital too, but he’s collected $500 million a year in his special dividend.

Buffett made a similar deal with General Electric. In 2008 he bought $3 billion in preferred shares with a 10 percent dividend. But you wouldn’t have done well to follow him. The stock was selling at around $21 a share in the fall of 2008. Now it’s running between $15 and $16, a loss of over 20 percent. But remember, unlike regular investors, Buffett’s been collecting that 10 percent dividend. He’s still ahead of the game.

Now Buffett is investing in beleaguered Bank of America. He invested $5 billion in a special preferred stock and will be getting a 6 percent dividend, while the regular stock you can buy pays less than 1 percent. Now I don’t know whether Bank of America is a good deal at current prices. Maybe it is. But the point is, if you buy now, you’re not getting the same terms as Buffett. You’re just pumping money into his dividend payment and hoping for the best.

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You can profit from the stock market. You can probably profit from following Buffett’s advice to keep it simple, invest in what you know, and buy when others are fearful. You might profit from buying into some of Buffett’s long-term holdings like Coca-Cola, American Express, and Proctor & Gamble. These stocks are unlikely to provide spectacular growth, but are probably going to produce decent returns over time. You eventually might even be able to afford a modest house in a place like Omaha, Neb. But if you try to jump in now and buy on Buffett’s coattails, you will surely be left behind.

Tom Sightings is a former publishing executive who was eased into early retirement in his mid-50s. He lives in the New York area and blogs at Sightings at 60, where he covers health, finance, retirement, and other concerns of baby boomers who realize that somehow they have grown up.