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Should You Buy Warren Buffett’s Next Stock Pick?

Credit: The Motley Fool

Last week, newswires were awash with reports of Warren Buffett’s US$2.5 billion in paper losses which happened in quick succession. Shares of technology service provider International Business Machines Corp., and global beverage giant The Coca-Cola Co. declined following disappointing financial results. Coca-Cola and IBM are Berkshire Hathaway’s second and fourth largest stock holdings respectively – where Buffett is the Chairman and Chief Executive Officer.

At the face of such drastic sounding news, is this a good reason why an individual investor shouldn’t follow Buffett’s next stock pick?

Do you have Buffett’s portfolio?  

I would argue that these reasons are not good enough.

Lest we forget, and focus too much on recent events, Buffett’s long term track record has been impeccable. Over the long term, the investing maestro has delivered book value growth of around 20% per year. This outstanding performance easily beats the 8.39% annualized earnings of the SPDR STI ETF (SGX:ES3), an index tracker for the Straits Times Index (SGX:^STI).

Context is also crucial here.

Although the US$2.5 billion would be a princely sum for anyone, it only represents a small fraction of Berkshire Hathaway’s stock holdings. As of the end of the second quarter of 2014, the company had US$116 billion in stocks as well as US$55 billion in cash and equivalents.

In other words, Buffett can well-afford to endure such losses. 

Foolish Takeaway

Getting the right context is important for investing. While nine figure losses would sound scary to individual investors, it may not be as daunting for the portfolio managed by Buffett.

Similarly, adding a technology growth story like Sarine Technologies Ltd (SGX:U77) to a portfolio full of stalwart companies is a very different consideration from including it into a portfolio filled with high growth shares.

So, before the individual investor chases the next stock pick from Buffett, the better question would be whether the stock pick finds a good place in your own portfolio. By finding the right context, Foolish investors may just find themselves better off.   For more Foolish Investing tips, sign up now for a FREE subscription to The Motley Fool’s weekly investing newsletter Take Stock Singapore. 

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong owns shares in Berkshire Hathaway.