Dear folksy Warren Buffett has a secret routinely overlooked by the throng of media worshipers today: over the years as his fund and notoriety grew, Warren became a multi-billionare and his investment company became a mammoth buy and hold fund that has tracked the S&P 500 both in price action and volatility during the past 11 years of this secular bear. Buffett likes to talk about his internal book value gains, but the actual returns for his investors are found in the price experience of the publicly traded shares they hold, shown in this chart of the S&P 500 and Berkshire A shares since 2003.
Actually thanks to the tiny 2% annual dividend of the S&P 500 over this time frame, Berkshire shares have underperformed the index on a total return basis. What is most important to real life investors however is the fact that “The Buffett Way” has provided no meaningful risk management or protection for capital invested over this entire period. This matters because, having lost half of their market value along with the S&P in 2008, Berkshire shares spent the next 5 years just getting back to 2008 levels once more; and it has only been over the past 15 months of HFT and QE-mania that Berkshire shares have begun to make net gains again. Over the past year or so, Warren has been taking his victory laps once more.
The problem now of course, is that this market cycle is long in the tooth and valuations are more over-stretched today than they were at the 2007 and even the 2000 peak in most indicators. After both of those manic tops, Berkshire shares plunged with the broader markets giving away 12 years of apparent gains in 15 months. Since Berkshire is an equity fund with too-big-to-move concentrated positions, it now follows a buy and hold approach. Not surprising then that Buffett says he doesn’t sweat about the economy or market moves; he doesn’t worry about market rigging or HFT front-running, he just buys businesses he likes. Nice but, how does any of that help real people with finite life spans and time horizons. After all, 99.999% of the world’s population are not billionaires Warren. For most of us, years spent making back losses are years we simply can’t afford.
This doesn’t make Buffett a bad man or anything, but not exactly an investment savior either…
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