Buffett hasn't beaten the market regularly since '07

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gordon9775
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Buffett hasn't beaten the market regularly since '07

Post by gordon9775 »

Rick Ferri noted last week that Buffett and Bogle have some important overlaps, and those are reiterated later on in this piece. But of course, the headline is that statistical analysis has showed that Buffett failed to outperform the market four out of the past five years, which may explain why even WB advises ordinary investors to park their money in a Vanguard index fund.

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berntson
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Re: Buffett hasn't beaten the market regularly since '07

Post by berntson »

Two comments. (1) Twenty years ago, Warren Buffet started talking about the disadvantage of managing large sums of money. He called Berkshire's huge amount of capital an "anchor" that he would drag along as best as possible. So even assuming that his investments have displayed skill, he is in effect playing with one hand tied behind his back. (2) Five years is perhaps just barely enough financial time to be interesting. I much prefer to judge strategies based on longer time frames.
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TheTimeLord
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Re: Buffett hasn't beaten the market regularly since '07

Post by TheTimeLord »

My understanding is the Buffet philosophy is geared towards doing better than average in down years and average during good years.
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Re: Buffett hasn't beaten the market regularly since '07

Post by sambb »

There are millions of investors. Someone had to get lucky and hit the right stocks. No different from winning the lottery, etc. Hard to separate brilliant from lucky. Probably takes a little of both. I really don't follow Buffet, and consider him largely irrelevant to the average investor. Of course his folksy style is admired in the US, and i tip my hat to his work ethic and luck. Same to peter lynch, and other great investors. Nice to guess right for a prolonged period of time. One day I was in vegas and saw someone hit the craps table and win nearly continuously for hours. He turned a $100 investment into $40000. Amazing luck + skill combo. I will stick to indexing.
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Re: Buffett hasn't beaten the market regularly since '07

Post by Random Walker »

I too am bewildered by those who would consider buying BRKB instead of a diversified collection of mutual funds. Buffet and his company may be an amazing business. But the performance of a company's stock can be very different from the business. The man and his company have got to be one of the most intensely studied on the planet. And the market incorporates all of that study into the daily stock price. So public returns on the stock would be expected to be quite average. Moreover, the market prices risk. If he is perceived as less risky, then expected returns would be even lower.

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packer16
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Re: Buffett hasn't beaten the market regularly since '07

Post by packer16 »

I don't understand the bewilderment. At this point Berkshire is like a low cost non-recourse leveraged index fund. They hold a diversified set of businesses like the S&P (higher quality) for a much lower management fee than an index fund and its components. The reason why index funds do well is because of there low cost not because the market is perfectly efficient. So Berkshire has a good shot at beating the index due to lower costs. Most active managers due poorly because of fees. So there are inefficiencies out there it is just that the managers get the lion's share of the outperformance via their fees. The non-recourse leverage is nice because it is long term and low cost float. The change in book value in 2008 shows the downside protection Berkshire has. There are few other firms that follow the Boglehead low cost diversified company approach like Fairfax and MRK in equities and BAM in real estate.

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Re: Buffett hasn't beaten the market regularly since '07

Post by YDNAL »

gordon9775 » Sat Apr 05, 2014 2:47 pm

Rick Ferri noted last week that Buffett and Bogle have some important overlaps, and those are reiterated later on in this piece. But of course, the headline is that statistical analysis has showed that Buffett failed to outperform the market four out of the past five years, which may explain why even WB advises ordinary investors to park their money in a Vanguard index fund.
Isn't 5 years a sufficiently short period that it should be irrelevant to compare to anything in order to write something - that is, unless you HAVE TO write something?

When Berkshire’s gain in net worth during 2013 was $34.2 billion, Buffet can invest almost $18 billion to purchase all of NV Energy and a major interest in H. J. Heinz, or plunk $4 billion in ExxonMobil. Some of this may (may not) have bearing on comparisons. Secondly, If your personal net worth is north of $60 billion, after billions in gifts, Buffett's investments should be irrelevant other than being a story. Sure, those of us with $6 to our name should invest in index funds.

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stemikger
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Re: Buffett hasn't beaten the market regularly since '07

Post by stemikger »

StarbuxInvestor wrote:My understanding is the Buffet philosophy is geared towards doing better than average in down years and average during good years.
You are right. He says this in the 2013 Letter to Shahreolders.
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Re: Buffett hasn't beaten the market regularly since '07

Post by grayfox »

I went over to M*. They show that $10,000 invested 5-years ago (4/6/2009 to 4/6/2014)

VTSMX 25,522.35
BRK.A 20,323.09

So it is true, BRK.A trailed the market over the past 5 years. I would not be crying though, because BRK.A still doubled in value.

VTSMX vs BRKA (4/6/2009 to 4/6/2014)


The absolute bottom was March 6, 2009. Kind of hard to beat the market when you start from the bottom.

Now as I recall, I was hearing the same thing about Buffett in 2000. They said he lost his edge, he was washed up, blah, blah blah. M* show that $10,000 invested for 5-years (4/6/1995 to 4/6/2000)

VTSMX 30,680.94
BRK.A 25,454.55

BRK.A trailed the market during the 5 years of irrational exuberance. But BRK.A was still up 2.5x

VTSMX vs BRKA (4/6/1995 to 4/6/2000)

:idea: In both cases, it's wasn't that Buffet did poorly. It was that the stock market went up so fast.

But then the next three years, $10,000 became

VTSMX 6,127.24
BRK.A 12,055.75

BRK.A was only up 1.2x. The market was up only 0.6x (In other words, it was down -40% :) )

:?: Is the lesson that BRK.A trails the market when bubbles are forming? Because I would believe that.
Last edited by grayfox on Sun Apr 06, 2014 8:30 am, edited 1 time in total.
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midareff
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Re: Buffett hasn't beaten the market regularly since '07

Post by midareff »

I'd be surprised if he did while hauling that big cash anchor around.
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Re: Buffett hasn't beaten the market regularly since '07

Post by simpleton »

Since inception, the Vanguard Small-Value Index (VISVX) has had pretty tight tracking with Berkshire Hathaway (BRK.B), and in fact has done better.

http://morning-wave-7809.herokuapp.com/#BRK.B/VISVX


If you want to geek out, here's a paper on the topic: Buffet's Alpha
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Re: Buffett hasn't beaten the market regularly since '07

Post by dansnad »

How much do you think Berkshire will drop when Buffet resigns or dies? If he is a special talent, how depressed will its earnings be over time because he is no longer guiding it?

How much do you think total market index funds will drop when Buffet resigns or dies, etc.?
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Re: Buffett hasn't beaten the market regularly since '07

Post by Louis Winthorpe III »

dansnad wrote:How much do you think Berkshire will drop when Buffet resigns or dies? If he is a special talent, how depressed will its earnings be over time because he is no longer guiding it?

How much do you think total market index funds will drop when Buffet resigns or dies, etc.?
Good point.
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Re: Buffett hasn't beaten the market regularly since '07

Post by packer16 »

It will not drop for very long. He has assembled above average companies and has develop a culture that can endure based upon his succession plans. I think the bigger risk in the S&P 500 is Apple and how long its advantage will last given the field it is in and the potential indexing bubble like what happened in 2000. With alot more folks indexing the probability of overvaluation of what they are buying is high especially if index funds are the major investors (i.e. setting the price versus relying on others to set a fair price especially for some of the these large cap names).

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Re: Buffett hasn't beaten the market regularly since '07

Post by ogd »

Packer: except index investors aren't the ones setting prices, they are neutral between stocks in the market. If net inflows/outflows are zero, an index fund will never buy more Apple regardless of how much Apple rises. If you were worried about money flowing into stocks, then you might have a point, but as far as index funds are concerned that's a tide that lifts all stocks not just the ones you don't like.

That, and index investors are still the minority AFAIK.

The thing to remember about Buffett is that a large part of his early performance is a selection effect: out of many potential Buffetts, he's the one that made it. He still did remarkably well, but I wouldn't be surprised if it just stopped one day, particularly after his methods have been exposed and learned from.
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Re: Buffett hasn't beaten the market regularly since '07

Post by RenoJay »

I hope this isn't too off-topic, but Buffett compares Berkshire's "book value" against the actual return of the S&P 500 including dividends. This always struck me as an apples to oranges comparison since, if shareholders are forced to liquidate their BRK holdings, they don't get the choice to sell at book value...they must take the market value of the share price.

The Berkshire Hathaway reports shows a drop in book value of 9.6% in 2008, vs. a plummet of 37% for the S&P 500. But in reality, BRK-B shares lost about 30% of their value that year. Any shareholder who ran into trouble would have had to eat that 30% loss if he sold at the end of 2008. Also, it seems to me that perhaps the book value of the S&P 500 didn't fall as much as it's share price.

So can anyone explain how this is a fair comparison? Shouldn't BRK be subject to the same apples to apples share price comparison of every other company and fund?
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Re: Buffett hasn't beaten the market regularly since '07

Post by packer16 »

It is fair comparison of what Buffet controls, the returns on his investments not the premium to book value his shares trade at which is a function of the market. In theory, if the market is rationale the increase in share price should reflect the increase in book value with fluctuations around that value for sentiment.

Indexers may well set the price if inflows in index funds provide most of the demand for a security. The assumption behind indexing is someone else is setting the price and as indexing becomes more popular that is less of the case. I think the 2000 bubble was partially index induced as the prices went up and more folks indexed it pushed prices up higher. You can see it in the subsequent underperformance in 2001 to 2002. This is the same assumption made in portfolio insurance and this blew-up in 1987 and increased the damage from that fall.

This theorizing about a selection effect is more of a rationaliztion of the EMH than reality as is typically proposed by academics versus day to day practitioners in the market. How many of us have actually done real security analysis and have seen if there are undervalued securities? I have and found some but not all over the place. So you have be careful that you are not rationalizing a framework that is not true in reality. What may be happening is there is excess return out there but it is being consumed by fees. That is why someone like Buffet or the guys at FFH and MRK may be a good selection for a portion of your assets because they can exploit these mispricing without charging high fees.

An interesting exercise is to examine rolling 5-yr performance histories of BRK versus the index. If you look at this way Buffet has one four out of five, not to bad with such a large fund.

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Re: Buffett hasn't beaten the market regularly since '07

Post by RenoJay »

Packer, thanks for the response. I'd be lying if I claimed I understood all of it, but I still have the question that if Buffett has control of book value of BRK, wouldn't CEOs of other S&P 500 firms have control of the book value of their stocks? Aren't they subject to the same wisdom of the crowds/madness of the crowds with their stock prices that BRK is subject to?
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Re: Buffett hasn't beaten the market regularly since '07

Post by ogd »

packer16 wrote:Indexers may well set the price if inflows in index funds provide most of the demand for a security. The assumption behind indexing is someone else is setting the price and as indexing becomes more popular that is less of the case. I think the 2000 bubble was partially index induced as the prices went up and more folks indexed it pushed prices up higher. You can see it in the subsequent underperformance in 2001 to 2002. This is the same assumption made in portfolio insurance and this blew-up in 1987 and increased the damage from that fall.
I should perhaps clarify: indexers don't affect the relative price of securities in the index. If an index buys twice as much of A than B, it's because of price action that occurs elsewhere, in the active investor realm, and it's the result of their research and conclusions. If index buyers affect the absolute price of a security, due to inflows, then the question is would those inflows have occured anyway and would they have been any wiser? Personally, I think we would have been better off if the majority of the inflows around 2000 would have been spread around by indices, as opposed to concentrating in growth stocks by individual investor enthusiasm about tech, which we all remember vividly.

(I am only talking about cap-weighed indices, of course. Other methods don't have this property and they will indeed affect relative prices. Cap weighing is fundamentally more robust in that way).
packer16 wrote:This theorizing about a selection effect is more of a rationaliztion of the EMH than reality as is typically proposed by academics versus day to day practitioners in the market. How many of us have actually done real security analysis and have seen if there are undervalued securities? I have and found some but not all over the place. So you have be careful that you are not rationalizing a framework that is not true in reality. What may be happening is there is excess return out there but it is being consumed by fees.
Generally speaking, I've learned to recognize a bad argument in investing and elsewhere by the presence of the sentence in bold or a variation thereof. It's not that "practitioners" are not as smart, perhaps the contrary, but what they lack is the tools, or willingness to apply them, to analyze the validity and impact of their own conclusions. When academics look at mutual fund performance with statistical methods and their reputations at stake (as far as the honest application of their methods), I listen. When the fund manager du jour speaks or writes about their convictions about this stock or sector, I couldn't care less. By next year, they'll probably change their tune anyway.

And yes, I do believe funds are able to generate alpha by exploiting the less skilled investors, but this is getting harder and harder and it's well below fees by now from what I've read. It also raises the question, as an individual investor spending a few hours on undervalued securities, are you more likely to be the exploiter or the exploited? When I look at my field, and what someone with amateur skills in it can achieve (very little), I'm not optimistic about my chances at playing on the Wall Street home court.
packer16 wrote:That is why someone like Buffet or the guys at FFH and MRK may be a good selection for a portion of your assets because they can exploit these mispricing without charging high fees.

An interesting exercise is to examine rolling 5-yr performance histories of BRK versus the index. If you look at this way Buffet has one four out of five, not to bad with such a large fund.
Good for him. Remember that as a value investor you need to benchmark him against an appropriate value index, with the overall outperformance of "value" being one of the few chinks in the EMH armor. And remember that it's all about the past. My personal prediction about the future is that neither Buffett nor value will outperform with any consistency, on a risk adjusted basis, going forward. As far as Buffett is concerned, I'm not willing to risk a chunk of my money on the whims of one guy on the meager chance that that outperformance occurs.
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Re: Buffett hasn't beaten the market regularly since '07

Post by packer16 »

That is good way to think about indexing but I wonder if the $1 would go to the mo-mo players would it even be in competition for an index fund? I would think the value funds would be more competition for the index funds versus the mo-mo funds. If that is the case then indexing could enhance the bubble. In addition, there are some studies that show that stocks when a stock enters an index there is an entry premium of 9% and a smaller permanent premium thereafter. Going forward these will get higher. There is a cost to indexing it is just alot lower than the alternatives.

You are right about manager noise but I think if you concentrate on managers who focus on valuation and variation from valuation as a key criteria from purchase you will get a more consistent story. Some of these include Buffet, Prem Watsa, Seth Klaman and Monish Pabrai. As to academics being better than practitioners I am skeptical for two reasons. The first is "Physics Envy". If you look at the background of most of the finance professors it is hard science or engineering undergrad or master followed by finance PhD. So you have folks applying hard science methods to a non-hard behavioral field. You can reach some conclusions but not to the extent that you can in science and engineering. Second, what drives crazy statements by fund managers "ego" is also present in academia with some of the academics having giant egos. Any smart practitioner is humble because he knows he is wrong at least 30 to 40% of the time. Academics with limited experience in the market have not experienced this humbling experience. My issue with the rationalization hypothesis is that it is an excuse not to investigate. It is one thing if someone has investigated value managers ideas and letters and have reasons to disagree but it in another to not even investigate because of the EMH.

I think some folks can achieve better than average performance by focusing on discounts to value. This requires training and I am a business appraiser by profession so I work with this data every day. In our work I have noticed valuation mispricings and have been able to take advantage of them. For the average guy, I recommend index funds and some of the diversified insurance/holding companies like BRK/FFH/MKL. These are all low cost options. The diversified insurance/holding companies all have equivalent expense ratios of less than 10bp. The nice thing about the diversified holding companies is there low costs and the ability to read probably some of the best financial writing out there in there annual reports. The main issue with these is they trade a premium to book so that can fluctuate over time. But if you are patient you can typically pick up one of these three a slight premium to book. Of three, right now I like MKL.

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Re: Buffett hasn't beaten the market regularly since '07

Post by ogd »

packer16 wrote:You are right about manager noise but I think if you concentrate on managers who focus on valuation and variation from valuation as a key criteria from purchase you will get a more consistent story. Some of these include Buffet, Prem Watsa, Seth Klaman and Monish Pabrai. As to academics being better than practitioners I am skeptical for two reasons. The first is "Physics Envy". If you look at the background of most of the finance professors it is hard science or engineering undergrad or master followed by finance PhD. So you have folks applying hard science methods to a non-hard behavioral field. You can reach some conclusions but not to the extent that you can in science and engineering.
I agree that economics doesn't have the luxury of hard data that physics has, it's a fact of life. But it's a problem shared with other fields, like psychology, social sciences and even certain branches of physics itself -- e.g. particle physics ever since the extreme expenses involved have slowed the flow of experimental data to a trickle. I think the academic system still has value and it's better than alternatives -- the peer reviewing, the possibility and likelihood of refutations, the extreme value of reputation and quality of writing. If you're wrong or dishonest in this system it can ruin your career forever, whereas in the practitioner field -- well just look over at the parallel Nassim Taleb thread, or think of Gross or Hussman, results from 10 or 30 years ago still carrying through a miserable period, with dissemination venues like CNBC and WSJ giving them a voice for entertainment reasons. I view the pronouncements of gurus as more literary than anything else.
packer16 wrote:That is good way to think about indexing but I wonder if the $1 would go to the mo-mo players would it even be in competition for an index fund? I would think the value funds would be more competition for the index funds versus the mo-mo funds. If that is the case then indexing could enhance the bubble. In addition, there are some studies that show that stocks when a stock enters an index there is an entry premium of 9% and a smaller permanent premium thereafter. Going forward these will get higher. There is a cost to indexing it is just alot lower than the alternatives.
Well the temptation when judging indexing is to imagine that the money would otherwise flow only into the stocks and methods you like. Whereas the evidence from the non-index money is that they'd be spread around, pretty much averaging to the index.
packer16 wrote:I think some folks can achieve better than average performance by focusing on discounts to value. This requires training and I am a business appraiser by profession so I work with this data every day. In our work I have noticed valuation mispricings and have been able to take advantage of them. For the average guy, I recommend index funds and some of the diversified insurance/holding companies like BRK/FFH/MKL. These are all low cost options. The diversified insurance/holding companies all have equivalent expense ratios of less than 10bp. The nice thing about the diversified holding companies is there low costs and the ability to read probably some of the best financial writing out there in there annual reports. The main issue with these is they trade a premium to book so that can fluctuate over time. But if you are patient you can typically pick up one of these three a slight premium to book. Of three, right now I like MKL.
It's a good idea, then, to track your performance in an honest way and judge if it was worth it, considering the time spent as well. Whenever I think about it I find it impossible that a fund, even an expensive one, wouldn't do it for less because of the huge economies of scale, let alone the index fund who grabs all that research for free. The only way I think I could get away with it was if I counted the time researching and trading as a hobby and didn't bill it to my returns. For some it is just that.

As for Berkshire, I won't lie: I strongly considered investing in it as a cheap, no-dividend (most important), low-expense value fund, but what always gave me pause is that it's centered on the calls of one individual surrounded by people who think like him. They could easily have an off decade with my money. I couldn't bring myself to accept that, so the market it is, for me.
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