Today, I revisit a couple of very popular questions: Is Warren Buffett the greatest investor of all-time? If he is, then why don’t I just invest in his company, Berkshire Hathaway?
Warren Buffett, business leader, investor and philanthropist, was born in 1930 and is considered one of the most successful investors worldwide. As of December, he is the fourth richest person in the United States, behind Bill Gates (Microsoft), Jeff Bezos (Amazon) and Mark Zuckerberg (Facebook).
Since I do not have access to the total (reported and unreported) investing wealth world-wise, it would be impossible to answer the question if Warren Buffet is the greatest. We do know that at age 11, Buffett bought his first shares of Cities Service preferred stock. Then, in 1962, he became a millionaire and has since built his portfolio into billions. As a notable philanthropist, Buffett pledged to give away 99% of his fortune.
For decades, Buffett has been the posterboy for buy-and-hold investing. One can follow the holdings of his company, Berkshire Hathaway, and see holdings bought and sold, negating the long-term buy-and-hold mantra.
Buffett is skeptical that active management can outperform the market in the long run and is a supporter of index funds for people not interested in managing their own portfolio. One quote that he and I agree on: “When trillions of dollars are managed by Wall Streeters charging high fees, it will usually be the managers who reap outsized profits, not the clients.” This is from one of his annual letters to his shareholders. Although I am not a shareholder and never plan to be, the public has access to his annual letter and is something I look forward to reading.
In 2007, Buffett made a decade-long bet with many top money managers that a simple S&P 500 index fund will outperform hedge funds that charge exorbitant fees. A decade later, in 2017, the S&P 500 index fund outperformed every hedge fund that made the bet against him.
To answer the question on investing in his company Berkshire Hathaway, let’s compare its performance to investing in the general market. I will go one step further and throw in small- and mid-cap index to the mix along with the results of simply investing in the main market ETF SPY.
I charted the performance (since the beginning of the current bull market March 2009 to date) using these major equity indexes: S&P 600 Small Cap Index ($SML-pink line), S&P 400 Mid Cap Index ($MID-purple line), S&P 500 Large Cap Index ($SPX-green line), Berkshire Hathaway-A shares (blue-line) and the SPDR S&P 500 ETF (SPY-red line).
The results and returns are as follows: Small caps (422%), Mid-caps (386%) and large caps (363%) outperformed Berkshire Hathaway (348%) during this time period. Buffett was correct in recommending investing in a market index and is proven by the outstanding results of the SPDR S&P 500 ETF (SPY-red line) outperforming the entire group with a (472%) return.
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Since we never use just one time frame to reach our conclusion, let’s now audit the performance results of the same group from Jan. 1, 2019, to date.
The results and returns are as follows: Small caps (29%), Mid-caps (23%) and large caps (29%) outperformed Berkshire Hathaway (10%) during this time period. Once again, Buffett was correct in recommending investing in a market index and is proven by the outstanding results of the SPDR S&P 500 ETF (SPY-red line) outperforming the entire group with a (31%) return.
Here are the key points to remember:
1. Just because Berkshire Hathaway was the performance laggard in both timeframes, it does not mean it will always be.
2. This data represents two specific time periods. The results can be different using different dates.
3. When investing, diversification among different equity groups reduces risk.
4. Just because SPY was the leader in both timeframes, it does not guarantee it will always be the leader.
If you want to learn about the different market indexes, tools and systems to better manage your holdings, email me about my upcoming online training starting later in 2020.
What’s next? I am working on a multi-week series on how to outperform the market. Along the way, I will revisit the very popular topic on how to spot market tops, and what you have been waiting for — cannabis stocks to provide valuable insight to help keep your profits from going up in smoke.
It will be an interesting year, for sure.
Plan your work, work your plan, and share your harvest!
DAVID O. ENGLAND is an investor/trader, financial analyst/educator/lecturer and Associate Professor Emeritus of Finance. This column is for educational purposes only and not intended as financial advice. Past performance does not dictate future returns. Questions? Send to email@example.com.