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Stockpickr: Four Ways to Win Like Buffett

James Altucher

Warren Buffett, considered by many to be the greatest investor ever, is a difficult but not impossible guy to piggyback. What follows are various ways to emulate Buffett, without necessarily mimicking his portfolio.

That said, there's a lot of value in paying attention to his holdings. For instance, when he announced he was buying up to 20% of USG(USG Quote), the stock was at $50. It dipped to $45, where it was possible to pick up shares below Buffett's price. When he first announces his purchases, the stocks he is buying usually spike up. However, that glow eventually wears off and the market takes over.

Buffett's portfolio is the most viewed portfolio on Stockpickr, with close to 100,000 views. But I still believe there's value to be had in bookmarking the portfolio, which you can do by rating it with four stars, and getting notified whenever we update one of his positions. We track not only his positions from filings, but also any public statements he makes about a position.

However, there are other ways to piggyback Buffett's ideas and investments. Here are the four things you need to know to take advantage of Buffett's style without necessarily following his portfolio.

1. You need to know his stockbroker.

When Buffett was moving up in the investment world in the 1960s and early '70s, he used Tweedy Browne as his brokerage firm. For instance, Tweedy Browne helped Buffett accumulate much of his stake in micro-cap (at the time) Berkshire Hathaway(BRKA Quote).

The firm was founded by several former employees (including Buffett) of the investment firm Graham-Newman, which was renowned economist Benjamin Graham's company. They went on to form the very successful Tweedy Browne Global Value Fund. Last year the fund was up 20.1%, and its three-year annualized return is 17.5%. Chris Browne recently wrote The Little Book of Value Investing with Tim Melvin, trader extraordinaire.

You can learn a lot of these guys.

2. You need to be looking for the next Berkshire Hathaway.

You might not find stocks that go from $10 (where Buffett started buying his shares) to $100,000, but it's not so bad if you can find stocks that go from $400 to $100,000 -- as many Berkshire millionaires were able to do. I met a guy once at the 2003 Berkshire annual meeting who bought 200 shares in 1976 when they were trading around $100. He sold 100 of his shares when the stock doubled, figuring he'd lock in some gains. The 100 shares he held on to are now worth $10 million. Think about that.

There's a Stockpickr portfolio we set up based on criteria from value blogger "One Guy's Investments" of the next Berkshire Hathaway:

• It's run by great investors who are trying to emulate Buffett's investment style;
• It has enormous cash flows and/or float by which to invest; and
• It doesn't split its stocks.

Some of the companies on this list are well known, like super-investor Eddie Lampert's Sears Holdings(SHLD Quote), while others are less well known. Here is the full list of potential next Berkshire Hathaways.

3. You need to know his friends.

In particular, Bill Ruane, who set up the Sequoia Fund. When Buffett shut down his hedge fund in 1970, he suggested to his investors that they put their money in Sequoia (Ruane and his partner started the firm specifically to handle Buffett's investors). Since 1970, Sequoia has had an annualized return of 15.7%. Check out the fund's current holdings.

Of course, Berkshire Hathaway is on the list, but they also have been accumulating shares of MasterCard(MA Quote) and various retailers, including Best Buy(BBY Quote).

Another good Buffett friend to keep an eye on is Charlie Munger, Buffett's vice chairman at Berkshire who has worked with him for over 40 years. Buffett first refers to Munger (although not by name) in a letter to investors in 1965 when he refers to a smart investor who helped him to decide to put some money in American Express(AXP Quote).

Although Munger's positions are hard to separate from Buffett's because Berkshire Hathaway is the parent company of Munger's investment vehicle, Wesco, we have set up a portfolio for Munger's top positions or other companies he's involved in.

It's also worthwhile to watch Buffett friend and Berkshire board member Bill Gates -- Gates' personal portfolio is heavily influenced by Buffett.

4. You need to know how to arbitrage.

Buffett set up his initial partnership in the 1950s, and then all through the '60s he made a large amount of his profits each year from short-term arbitrage situations. Most people think of Buffett as a pure buy-and-hold investor, but this was definitely not true when he first started out.

As recently as 1997, Buffett stated that if he had just $1 million to invest (as opposed to $50 billion) he could still make returns of 50% per year. There's been some discussion at Stockpickr about how he would do this, but I believe the basic technique he would use is arbitrage. Arbitrage occurs when there are two potential prices for a single asset and you attempt to buy at the lower price and sell at the higher price.

A basic example of where this type of investment occurs in the markets is in merger arbitrage. If someone offers to buy company ABC for $50 a share and ABC trades for $45 a share (perhaps because people are doubtful the merger will occur), you can take advantage by buying ABC for $45 and later selling at $50 when the deal is done.

I plan to write a more detailed article on how to play this strategy and why these situations occur. In the meantime, at Stockpickr we're updating the latest merger arbitrage plays every week with some explanation for each one.

Stockpickr tip of the day: I don't follow football too closely, but I love to watch all of the commercials during the Super Bowl. We have a two-part series on how to benefit from looking at the stocks of companies that advertise in the Super Bowl. Here are some fun facts:

• Since Jan. 1, 2006, until now, the stocks of the top advertisers in last year's Super Bowl have together returned an average of 25% to their shareholders.
• Since 1987 until today, investing in the top advertisers returned 1,087% vs. 881% for the S&P 500.

For more information, plus some rationale as to why these things are occurring, please check out the blog posts here and here.