Lessons From A Legend

13 Apr By The Financial Bodyguard

The investment management industry loves its legends and there is none bigger than the nonagenarian ‘Oracle of Omaha’ Warren Buffett, CEO of the US-listed firm Berkshire Hathaway. Over the years in that role Buffett has built a portfolio of directly held companies alongside a portfolio of listed stocks. Today, he is worth over US$100 billion and is the world’s fifth wealthiest person. In anyone’s eyes, he is a highly successful investor and is often held up as a beacon in support of an active, judgmental approach to investing.

Paradoxically, Warren Buffett’s legendary status as an active investor provides some useful lessons in support of adopting a systematic, low-cost approach to investing.

Lesson 1: Believe In The Power Of Capitalism And Compounding Over Time

Buffet understands capitalism and the powerful wealth generation that it can bring. He started investing in 1941 when he was 11 years old, and now at 92 years old, has over 80 years of compounding returns from the predominantly US companies he has owned. By the age of 39 he was worth US$25 million. His life story is fascinating[1].

‘The genius of the American economy, our emphasis on a meritocracy and a market system and a rule of law has enabled generation after generation to live better than their parents did.’

Lesson 2: Patience And Emotional Fortitude Are Key

Buffett expects to hold the companies for the long-term, much like an index fund.

‘Our favorite holding period is forever.’

He strives to avoid making decisions driven by emotions in response to short-term market pressures, such as the poor relative performance of value stocks from 2018-20 or equity market falls.

‘The most important quality for an investor is temperament, not intellect.’

Lesson 3: Active Management Is Not Easy

Despite his incredible business acumen, and consequent track record, it is not easy to continue to beat the market over time. He has always been a value oriented investor and was notorious in the run up to the tech crash of 2000-3, stating that he did not get it. He was to some extent proved right.

As Berkshire has grown, finding deals that will make a material difference to performance has become harder. His early years were spent trawling for individual investment opportunities. In those post-war years, information was scarce, professional investors represented a far lower part of the investor base, and markets were probably less efficient. If he was starting out again, would he be as successful? Who knows? And there’s the rub.

Take a look at the chart below, which illustrates 20-year rolling windows of Berkshire’s performance relative to a US equity index fund. It is evident that the huge success of the early days, has given way to far more trying times. Over the past 20 years, you could have achieved virtually the same return by investing in an S&P 500 index fund.

Figure 1: Buffet’s alpha – it is not so easy to win anymore