|Has Warren Buffett's luck run out?
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- By Bill Bonner
Yesterday, the Dow hit a new high. The Nasdaq pushed over 5,000. And gold lost $7.
"Count no man happy until he be dead," said Solon. The man to whom this advice was given was the richest man alive at the time (6th century BC), the king of Lydia, Croesus. But the poor man soon discovered that fortune can turn against you, no matter how rich and powerful you are. His son died in an accident. His wife committed suicide. And he was captured and burned alive by Cyrus, king of Persia.
And now, poor Warren Buffett must be feeling the heat. He's 84 years old. The most successful investor of all time. Respected. Admired. Beloved, especially by the 1,000s of people he has made millionaires. And 'as rich as Croesus' himself.
He celebrated the golden anniversary of his investment company - Berkshire Hathaway - last week. And what a success! He turned every dollar invested in 1965 into $182,616 today. For thirty years, he never had a 10-year annualized gain of less than 20%. Over 50 years his annual return has been a staggering 21.6%.
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And now, Berkshire is worth $367 billion, with $195 billion in annual sales.
If money were what really matters, Warren Buffett would have no peer. He has had unparalleled success in this world; surely he has a first class ticket to the next. And if his good fortune is of his own making what would he have to fear?
But what if fortune, who smiled on him so broadly for so many years, begins to frown? That idea was raised on another 50th anniversary - the half-century mark following publication of Benjamin Graham and David Dodd's classic text, "Security Analysis". The occasion was used for a debate. On one side was Michael Jensen of the University of Rochester, arguing that Buffett's success was a matter of chance. On the other was Buffett himself. Jensen began by pointing out that when you have a nation of coin flippers, a few - by dumb luck -- are going to get a very long string of 'heads'.
Yes, said Buffett, but if all of those who were getting heads were all using the same technique, it should make you wonder. It would be as if there were a town where no one ever got cancer; you'd want to know what they were having for dinner.
Buffett's early success he attributed to the aforementioned "Security Analysis." That book was at least the Old Testament part Buffett's investment bible. He was to write the New Testament himself, fulfilling the prophecy laid out by his mentor, Ben Graham. "He who comes after me comes before me," Graham might have said, had he realized what his young acolyte from Omaha would achieve.
As Buffett explains in his 50th Anniversary report, Graham taught him "cigar butt" investing. The idea was to find the little value stocks that other investors had discarded. That worked beautifully, for many years.
But then Buffett went way beyond Graham. He bought the whole cigar company. And he bought well. That is what turned Berkshire into such a money machine and made Buffett so rich. For 36 years, Buffett tossed his coins and got heads every year.
In 2000, though, the tails began. You may say, he 'changed his strategy.' Or 'he made a mistake.' But if his success was based on skill, why would he suddenly forget how to make money?
"Berkshire's investment portfolio performance has been extremely poor for at least the last 14 years," writes Porter Stansberry.
Last week, Warren Buffett 'moved the goalposts.' That is, instead of reporting Berkshire's results only in terms of book value, he showed how well the company did in terms of share price.
"...between 1970 and 2000 the lowest 10-year annualized return on Berkshire's investment portfolio was 20.5%.
Starting in 2000, however, the wheels come off.
Between 2000-2010 the annualized return was 6.6%. And, after never recording an annual decrease in book value, Buffett lost money twice in the ten year period (2001 & 2008).
Relative to the S&P these numbers haven't gotten better since 2010.
In 2011, Berkshire's portfolio return was 4% (S&P was up 2.1%). In 2012, Berkshire's portfolio return was 15.7% (S&P was up 16%). In 2013 investments were up 13.6% (S&P was up 32.4%). In 2014, investments were up 8.4% (S&P was up 13.7)."
Why he did this is a matter of some controversy. Did he do it, as he claimed, because book value no longer gives an accurate picture of the value of his 'sprawling conglomerate?' Or did he do it because the gods have turned against him; his book value increases have underperformed the S&P for the last 14 years and it is becoming embarrassing?
Barrons has an opinion:
Buffett probably can be faulted for not being forthright in the letter about the disappointing performance of the Berkshire equity portfolio that he oversees. Of the company's big four holdings, American Express, IBM, Coca Cola and Wells Fargo, only Wells Fargo has been a notable winner in recent years...Buffett tends to manage the portfolio's largest and longest-standing investments. Two managers who help run the rest, Todd Combs and Ted Weschler, have outperformed Buffett in the past few years.
Is that Mr. Jensen we hear laughing?
But watch out, Jensen, you're not dead yet either.
Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.
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