When you think of top investors or money managers, names such as Warren Buffett, Bruce Berkowitz, Andy Stephens, or Christopher Davis come to mind. But are they really the best? They certainly are extremely successful, experienced, and intelligent managers; otherwise, they would not have reached the top of their field.
Recently, Morningstar, a leading provider of independent investment research, presented Berkowitz, one of my favorite money managers, with a prestigious award for domestic equity manager of 2009. Berkowitz’s fund, Fairholme Fund, returned 39 percent while the S&P 500 returned 26.5 percent. This is with no question a fabulous performance. However, just because Berkowitz or other money managers are given the title of “top money manager”, should individual investors blindly follow them and mimic their investment choices? Before answering this question, let me pose another one: Which person in the following photo would be more likely to run a race in the shortest amount of time?
If you are mimicking these top money managers, you are betting that the sumo wrestler is going to outrun the more physically fit athlete. I am not saying this to offend anyone but to help individual investors understand the fact that when money managers become successful, large sums of money flow into their firms and the more money they have under management, the more difficult it is for them to deliver a fabulous performance. So in a way, they become like sumo wrestlers who are asked to be marathon runners. But wait a minute! Didn’t I say that Berkowitz’s 39 percent in 2009 was fabulous? Yes it was, but considering that 2009 was one of the best years to pick stocks, this performance was just average. There are many other smaller investors, including myself, who delivered investment performances many times better than Berkowitz.
For example, Jae Jun, the author of Old School Value Blog, delivered almost 290 percent in 2009. I generated almost 350 percent the same year. Jun and I were able to deliver these results not because we are better investors than Buffett and Berkowitz – we are not even close – but because our lack of comparable experience is compensated by the expanded universe of companies that we can choose from. In 2009, I invested in numerous companies that had a market capitalization of less than $100 million.
One example of a small company like this is Arctic Cat (NASDAQ:ACAT) which was trading at half of the value of its inventory in 2009. Big money managers could not afford to even waste their time or resources to analyze companies of this size. On numerous occasions, Warren Buffett said that if he had less money to invest, he would have been investing in completely different companies. However, because of the size of Berkshire Hathaway (NYSE:BRK.A), his pool of possible investment choices is limited only to the biggest companies. Individual investors with less money can invest in micro, small, medium, and large cap companies without any restrictions. This is not to say that large cap companies cannot be excellent investments, but they are less likely to be mispriced because they might have hundreds of analysts studying them; it is not uncommon to find small-cap companies without any analyst at all covering them.
So the next time you choose to blindly mimic these famous investors, ask yourself this question: would my superstar money manager be investing in these same companies if he or she only had a portfolio of $1 million? If the answer is no, then maybe you should think about making your own investment decisions because with enough investment knowledge, you can open yourself up to many more opportunities and create much better returns than these superstars.