Doing better than the Oracle of Omaha may be the ambition of many investors. Here is a profitable strategy that has been winning for over 10 years.
“Does Warren Buffett Know Something That We Don’t?”. In recent hours, an article by Spencer Jakab in The Wall Street Journal has sparked considerable debate. Its title, indeed, raises an important and timely question given the current market climate.
It prompts readers to ponder the motivations behind his recent investment choices, decisions that have certainly raised eyebrows and, perhaps, some concerns about the future. “Warren, how’s it going?”
For the author, however, this question takes on even greater importance if asked directly of the man himself. Despite his recent investment decisions, an analysis of his portfolio’s performance suggests it may not align with the traditionally high returns that built his reputation as an “Oracle.”
To be clear, there is no criticism here of Buffett’s approach. However, it’s also fair to point out that this particular investment style might now limit the perception of his management skill to a somewhat neutral judgment when measured against the broader market.
The rise of ETFs (and similar financial products) has brought Buffett’s recent tracking error into sharp focus. After this acknowledgment, critics may feel free to express their discontent.
In a hypothetical philanthropic dinner, the author would perhaps prefer to sit beside another legendary figure in finance. The guest of honor would be Jim (James Harris) Simons, but unfortunately, since last May, this “dream” is no longer possible. So, let’s return to Warren Edward Buffett and his enduring Berkshire Hathaway.
This investment vehicle is widely recognized as the clearest embodiment of “Buffett’s philosophy” in action. Furthermore, by embracing the principle of non-distribution of dividends, the notion of maximizing returns has been reinforced, emphasizing the principle of compounding. No objections there.
Yet, despite the undeniable financial engineering behind his process, in recent years, Buffett’s vehicle no longer seems to generate the historic performance that once characterized his wise and prudent approach.
A simple search in the U.S. stock market over the past decade (2014–2024) illustrates this point. If an investor had placed $100 in Berkshire Hathaway (specifically, Class B shares) at the start of the period, that investment would now be worth just under $400 ($393.29).
This is undeniably an impressive return, yet it invites a question: What would have happened to that same $100 if it had been invested directly in the S&P 500?
Here’s the immediate answer: It would have yielded significantly less, reaching “only” $323.75. However, a more nuanced look suggests a flaw in this comparison—namely, the absence of compounding within the S&P 500’s structure.
To address this (correct) concern, we can use the S&P 500 Total Return index, which includes reinvested dividends. In that case, the return increases to $395.37, aligning more closely with Buffett’s returns.
For many, this level of performance would be satisfactory. But in the financial world, the pursuit of “alpha”—or the extra return over the benchmark—is the ultimate goal in any investment strategy.
Thus, we humbly offer a potential alternative to the Oracle of Omaha’s approach. Sometimes, as they say, the answer lies in the simplicity of small things. If we compare the S&P 100 Total Return index to Berkshire Hathaway over the same period, that initial $100 would have surpassed expectations, exceeding $400 to reach $432.11—a nearly 10% outperformance.
Digging deeper, a notable trend emerges in favor of this alternative. Over the 2014–2024 period, the S&P 100 Total Return outperformed Buffett’s strategy in most intervals, except from 2020 to 2024 and 2021 to 2024. For the remaining intervals, the more straightforward S&P 100 Total Return index consistently came out on top.
We’ll conclude with this: The numbers speak for themselves, and we won’t add anything further. Yet our initial question remains: “Warren, how’s it going?” With all due respect.
Original article published on Money.it Italy 2024-11-14 15:33:00. Original title: Vi svelo la strategia di investimento per battere Warren Buffet
