Thursday, May 01, 2014

Buffett and Ben: That’s As Good As It Gets—Redux—Part II

You will recall that last month’s column commemorated the tenth anniversary of a five part series of articles appearing in Viewpointe that provided a history of Warren Buffett and the incredible success of his company, Berkshire Hathaway. The column ended with the following statement: “It is impossible for the average investor to duplicate his [Warren Buffett’s] business experience, intuition, and innate ability to discern the difference between a great buying opportunity and one that is just mediocre. You might be able to imitate his techniques, but no one can imitate the man. While that conclusion may be a big letdown after investing time and effort in reading this series of articles, and having the Holy Grail within your grasp, but all is not lost. There are other options.” Following are the options referred to, as well as the rest of the ten-year old column that I believe has as much relevancy today as it did then.

The Option Game

Option #1: The simplest and most effective way to duplicate Buffett’s future performance is to allow him to manage your money. That’s right! Instead of searching for the (elusive) talented stockbroker, money manager, or mutual fund manager, you can hire Warren Buffett, acknowledged as the world’s best investor ever, to be your personal money manger (at no cost to you). How? Buy shares in Berkshire Hathaway. This is not to be construed as a recommendation or suggestion that your portfolio will benefit from this advice. However, if you believe that Buffett will continue to outperform the market averages, your performance will equal his. If the Class A shares of BRK are too pricey at some $90,000 per share, the “B” shares can be bought for under $60.00 [as of the end of January 2004].

The Best Advice

Option #2: With all the precepts, tenets, and principles espoused in the many books and articles based on the wisdom of the Oracle of Omaha, as Buffett is called, all but a few professionals can really implement these ideas, as absolute as they may be. The second option is simplicity personified. Usually, cheap advice is worthless. However, the true value of advice is usually predicated on the quality of the source. In this case, the source is Warren Buffett himself, and the advice costs you nothing. In essence, in a single, uncomplicated, easy to understand sentence, Buffett provides another form of the Holy Grail of Investments for the average investor. He states, “Let me add a few thoughts about your own investments. Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees. Those following this path are sure to beat the net results (after fees and expenses) delivered by the great majority of investment professionals.” That’s As Good As It Gets. [That was the end of the five-part article.]

Surprise, Surprise

If you had followed option #1 mentioned above, investing in Berkshire Hathaway as a proxy for Buffett, as of this writing, the ten-year old $90,000 “A” share is now worth $190,000, and a $60 “B” share $127, more than doubling your investment. However, there is much more to this story than even I expected. Going back into my “archives” of articles I have written for Viewpointe, I made three surprising discoveries. From a personal standpoint, I discovered that my articles have been appearing in Viewpointe for much longer than I realized––some 22 years. The second surprise was a Viewpointe article on Warren Buffett, written by me 19 years ago in March 1995, but forgotten until now. Here is a quote from that article:

“When I first became aware of Berkshire Hathaway in 1991, I was tempted to buy one share at a price of $8,000. That was after an incredible run up in price. My failure to do so mimicked the famous Jackie Mason reply to the question? ‘Why don’t you buy it now?’ He responds, ‘Now? Now it’s too late.’” I then wrote, “If you are a student of Warren Buffett, you must come to the conclusion, it’s never too late.” Until recently, most investment observers would have agreed with that assumption.

Above, I mention a price of $8,000 for Berkshire stock in 1991. By the time the March 1995 article was written, the price had almost tripled, to $23.000. Approaching a price of $200,000 now in 2014, can anyone argue that it’s never too late to buy Berkshire Hathaway stock? Here’s a surprising answer––maybe. In order to understand this, it’s important to know how Warren Buffett measures his own performance, using his own numbers.

The Book Value Benchmark

Over the years Buffett has always maintained that book value (essentially the difference between a company's total assets and total liabilities, and also the term for shareholders' equity) is a much more accurate indicator of a company’s true performance compared to the stock price, or market value. Indicating that importance, the very first page of his 2013 shareholder letter shows Berkshire Hathaway’s book value performance compared to the S&P 500 Index for each year since 1965. Since its inception, from 1965 through 2013, Berkshire Hathaway’s book value has increased a staggering 693,518% compared to 9,841% for the S&P 500 Index with dividends reinvested.

Maybe Not So Funny

The third surprise was a blockbuster in that recently, a funny thing happened based on the way that Buffett established what he believed to be the most sensible time period against which his performance should be measured. This was established 53 years ago in 1961 when he wrote to his limited partners. “First, one year is far too short a period to form any kind of an opinion as to investment performance. My own thinking is much more geared to five year performance, preferably with tests of relative results in both strong and weak markets.” He established an even more exacting requirement a few years later when he wrote, “If any three-year or longer period produces poor results we all should start looking around for other places to have our money.” In that same statement however, he also established a crucial qualifier writing, “An exception to the latter statement would be three years covering a speculative explosion in a bull market.” (More on that next month).

Viewing that first page of the 2013 shareholder letter, and comparing the first 43 years (out of a total of 48) of Berkshire’s book value performance vs. the S&P 500 Index, reveals a series of extraordinary numbers (some mentioned above). In all but six of those 43 years Berkshire outperformed the S&P Index fund––that’s an 86% record. But then comes the surprise, and the question, “What have you done for me lately?”

Is Buffett Another Michael Jordan?

In the last five years, circumstances have changed––dramatically. Beginning in 2009 through 2013, the S&P Index has outperformed Berkshire four out of five times. The S&P 500 returned 128% percent including dividends since the end of 2008. Berkshire’s book value per Class A share, rose only some 80 percent. This is the first time that Buffett fell short of his five-year goal since he took over Berkshire Hathaway in 1965.

This has led to some soul searching by Buffett buffs who are wondering if the best investor of all times is losing his touch. A recent New York Times headline read, “The Oracle of Omaha, Lately Looking a Bit Ordinary.” Written by Jeff Sommer, the editor and columnist for the NY Times Business Section, the article is based exclusively, as he writes, “In an analysis, conducted by Salil Mehta, an independent statistician with deep experience in Washington and on Wall Street. Part of the study appears on his blog, Statistical Ideas, and he shared the rest of it with me, in an elaborate spreadsheet filled with more than 30 pages of data and formulas.”

The article continues, “Mr. Mehta, who served as director of analytics in the Treasury Department for the $700 billion Troubled Asset Relief Program, and as director of policy, research and analysis for the Pension Benefit Guaranty Corporation, says Mr. Buffett’s record provides some humbling lessons about investment strategies.”

Further research on my part verifies Mr. Mehta as a very experienced, respected, and highly skilled statistical analyst, so his presumptions regarding Mr. Buffett’s future performance are rather startling, and should be worrisome to Berkshire shareholders. Near the conclusion of the article, Mr. Sommer writes, “Mr. Mehta won’t hazard a guess, but he does compare Mr. Buffett to Michael Jordan, the basketball star. ‘There were essentially two careers,’ Mr. Mehta said. ‘In the first, he was a superstar. And in the second, late in his career, he just wasn’t one anymore.’”

Even more troubling is the following: “In the previous decades, he [Buffett] had underperformed the S&P 500 only six times. Mr. Mehta said his calculations showed that given such a long period of outperformance, there is only a 3 percent chance that the recent stretch of underperformance was a matter of bad luck.“ So, is it really too late to invest with the master? To be continued in next month’s column.


Post a Comment

<< Home