The Secret to Beating Buffett  | BY Keith Kaplan
CEO, TradeSmith |
You probably wouldn’t think of yourself as having advantages over Warren Buffett when it comes to investing … but you do. You see, Buffett and his legendary investment firm Berkshire Hathaway are committed to buying stocks and holding them through thick and thin. Their ideal holding time is forever and, as Buffett’s partner Charlie Munger once put it, they want to own stocks they don’t even need to consider an exit strategy for. That’s a fine investment strategy and has certainly worked well for them. And at this point, that’s the kind of consistency Berkshire shareholders expect. Yet, at the same time, this inflexibility has actually cost those shareholders a lot of money. Contrary to many long-term investors’ opinions, there’s nothing wrong with opportunistically selling and buying stocks… so long as you have a system in place with a proven track record of doing it well. That’s exactly what we have at TradeSmith… with TradeStops Pro. TradeStops makes bad portfolios good, good portfolios great, and great portfolios incredible. Don’t get me wrong, Berkshire Hathaway is an all-timer investment portfolio. But even it is not perfect. Using our software, Berkshire could’ve handed its investors gains roughly twice as good over the last quarter century. Today I’m going to show you how we take the best of Buffett … and other billionaire investors – and beat them at their own game. Let’s Start with the Buffett Baseline We’ve analyzed Buffett’s track record as far back as we could get data for, which is August 2000. (By the way, this is not the stock performance of Berkshire Hathaway (BRK); this is the percentage gain of Buffett’s equity investments that are part of the Berkshire Hathaway portfolio of investments.) Since late 2000, every $1 invested in Buffett’s equity picks would be worth $5.69 today. That’s a healthy gain of 469%. That’s already strong outperformance, given that the S&P 500 rose 268% in the same timeframe. But if you’d applied TradeStops to guide the very same stock positions, you’d have done even better. Much better, in fact – with 856% profits during the last 24 years: 
Using TradeStops, we were able to take the exact same portfolio of equities and squeeze out even more profit. That’s because my system is about taking your best investing ideas and making them work even better for you, because you’ve optimized your profit potential… while managing risk. How did we do it? Here are the rules for beating Buffett: - Start with Buffett’s equity investments from his Berkshire Hathaway (BRK) portfolio.
- Sell any investment if our proprietary indicator signals a sell.
- If Buffett still owns an investment that turns from a sell back to a buy, then buy it again.
- Rebalance the portfolio to minimize risk.
Not only does my system combined with Buffett make more money, it does so while taking less risk. And that’s an important factor here. Billionaires like Warren Buffett are more willing to withstand volatility because their financial security isn’t really on the line. Buffett, with a $141 billion fortune, isn’t sweating a stock market crash like you or I would. For those of us who don’t have quite that much of a financial cushion, TradeStops helps us step back from stocks that fall below our risk point… then re-enter when they’re healthy. For example, Buffett’s Berkshire portfolio made a 36.8% profit by holding Restoration Hardware (RH) stock from late 2019 to mid-2023. But TradeStops would have had you out of RH in early 2020… re-enter that summer…then exit at the beginning of 2022. The result? Profits of 73.8% – double what the Berkshire portfolio saw from holding on through that whole rollercoaster ride. 
It’s not just Buffett’s portfolio, either. Ray Dalio’s positions would have performed much better with TradeStops as well: 
David Einhorn’s as well: 
And George Soros: 
And Carl Icahn: 
It’s not because we are smarter or better connected than any of these legendary billionaire investors. The investing ideas behind our results are still theirs. It’s just that we’ve programmed our software to help investors make more and risk less on every trade… even than Buffett and friends. The Emotion Eraser Normally, actively trading your investments is a recipe for bad decisions. That’s because, most often, we do it when our emotions take hold. But this isn’t the type of decision you want to leave to your gut. When it comes to investing, you must have a clear exit strategy for every investment you own. Trailing stops, where your stop-loss trails the stock price as it moves higher (but never as it moves lower), are about as close to the “perfect” exit strategy as you’re likely to find. And we personally use and recommend them for just about every public-market investment out there, including individual stocks, exchange-traded funds (ETFs), most stock and bond mutual funds, and even options. The only issue with this is one size doesn’t fit all. Volatile stocks, like Tesla (TSLA) for example, are much more prone to dropping 20% or more than something like, say, Johnson & Johnson (JNJ). But if you sold TSLA whenever it fell 20% and bought back in whenever it formed a new uptrend, you’d be in and out of the stock constantly. It’s a headache… and a bad investment plan. That’s why we recommend our readers use a specific kind of trailing stop based on the TradeSmith Volatility Quotient (VQ%). This is the risk-management strategy you saw in action with our billionaire-portfolio examples earlier. For stocks that are particularly volatile, the VQ% would direct you to give it a bit more room – 40%, even, instead of 20% – so you don’t miss out if the stock then “snaps back” just as hard as it fell. For stocks that are normally very stable, though, a 15% drop might be the “danger zone” where you’d want to exit. So, setting trailing stops like this on your own would require guesswork to figure out an appropriate level to sell for this particular stock. But we’ve taken care of all that guesswork for you. And we’ve taken all the other hard work off your hands, too, with a portfolio management platform that syncs with your brokerage and automatically shows you the VQ-based trailing stop on all your positions. It’s all part of our flagship trade management software. With it, you’ll never have to rely on anything but our battle-tested metrics to make sure your portfolio is ready for whatever may come. I recently joined Eric Fry of our corporate partner InvestorPlace to share in MUCH greater detail how this can work for you. My system will let you begin taking steps immediately to proactively manage your risk…even potentially side-stepping major crashes, as you’ll see here in our free presentation. All the best,  Keith Kaplan
CEO, TradeSmith | 
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