Warren Buffett: the exception who proves the rule

If you were asked who you thought was the world’s best investor, you might well say Warren Buffett, the Chairman and CEO of Berkshire Hathaway.

That would not be an unreasonable answer, given he is worth US$ 71.5 billion today , give or take a few million for daily market movements! He is also often held up by those in support of ‘market beating’ strategies as a shining example of their creed. Over 40,000 avid followers attended the 2018 annual shareholders’ meeting, referred to by some as ‘Woodstock for capitalists’ and his style of investing is known as ‘Buffettology’, on which numerous books and articles have been penned.

To us Buffett is the exception that proves the rule. Although he (via Berkshire Hathaway) owns a concentrated pool of hand-picked companies, he has several traits in common with a more systematic approach, such as an infallible belief in the power of capitalism to create wealth over time, which requires discipline, patience and fortitude to capture. He is comfortable being different to the market; famously he avoided tech stocks in the late 1990s because he did not ‘get’ them. He also detests fund management costs that detract from market returns.

His longevity in the game is a major factor in his legendary status.

We have a huge amount of respect for Warren Buffett but provide an alternative narrative that perhaps simply reinforces how difficult it is to beat the relentless upward march – with some inevitable setbacks – of markets for long-term investors. Buffett has been investing for almost three quarters of a century, starting early. By 32 years of age he was worth just shy of US$2 million. He is now almost 90. His longevity in the game is a major factor in his legendary status. It might surprise you to know that had he retired early at 60 in 1990, he would have been worth a paltry US$ 3.3 billion! In other words he would have been worth under 5% of his net worth today.

1. https://www.forbes.com/profile/warren-buffett/#772d85d74639
2. https://finance.yahoo.com/news/rich-warren-buffett-age-090000280.html

It is worth noting that it has been increasingly hard for Buffett to beat the market. In the early days, there were fewer research analysts and fund managers in the market and a far higher level of amateurs playing the game*. He was the shark in the pool. In the chart below, we show how tricky beating the market has become. Imagine that he had been persuaded to run a mutual fund, not a listed investment holding company. A manager with such a track record would be justified in charging a 1% fee per annum. In the past 24 years, he would not have beaten the market. Even without these fees Berkshire Hathaway’s shares have struggled to beat the markets in the past decade or so. The chart below illustrates the annualised return achieved from the date on the horizontal axis to the end of 2019.

It is worth noting that it has been increasingly hard for Buffett to beat the market.

Although he will always be remembered for his investing prowess, folksy words of wisdom** and his philanthropy (he intends to give away the bulk of his wealth), in our view his real legacy is his enduring advice to all investors that remains simple and direct:

‘When the dumb investor realises how dumb he is and invests in an index fund, he becomes smarter than the smartest investor…most investors, both institutional and individual, will find the best way to own common stocks is through an index fund that charges minimal fees.’

Alternatively:

‘It is not necessary to do extraordinary things to get extraordinary results.’

We agree.

* Estimated at 90% retail in 1950s – see John C. Bogle, ‘Individual Stockholders RIP’, WSJ 5th Oct 2005.
** If you are interested in some of his wisdom: https://www.fool.com/investing/best-warren-buffett-quotes.aspx
Main image credit: https://www.flickr.com/photos/donkeyhotey/12682081033

Dominic

About the Author

Dom is a qualified and experienced Chartered Financial Planner (CII) and Chartered Wealth Manager CFP (CISI) and a Registered Life Planner (Kinder Institute) with over 30 years experience. His work primarily focuses on retirement income planning, helping clients to maintain financial dignity and independence in retirement. Read more from Dominic...
This article is distributed for educational purposes and should not be considered investment advice or an offer of any product for sale. This article contains the opinions of the author but not necessarily the Firm and does not represent a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but is not guaranteed. Past performance is not indicative of future results and no representation is made that the stated results will be replicated.
This is my first venture into any kind of personal finance. Your candour and patience with me are very much appreciated. A.S. (London)

Expert Opinion…

Mindfulness – An Evening with George Kinder Replay

Jonathan, September 21st, 2020

Jonathan and Dom met George Kinder over 10 years ago when they were becoming increasingly disparaged by the way Financial Planning was evolving in the UK. They felt there must be a better and more connected way to help people with their financial futures. After providing such insight, they have kept in close contact with George which has led to developing our fundamental ethos at Expert Wealth Management.

Read More
Join The Expert Wealth Family As A Paraplanner

Jonathan, September 10th, 2020

You will be working for an Independent Financial Adviser who hold corporate Chartered Financial Planner and CISI Accredited Firm status, as part of a small team looking after the financial planning needs of around 200 client families. As Paraplanner you will be providing high quality support and ensuring complete and accurate records […]

Read More
Cash dividends: don’t bank on them

Jonathan, August 24th, 2020

‘Do you know the only thing that gives me pleasure? It’s to see my dividends coming in.’ John D. Rockefeller To this day we can still relate to the words of American industrialist John D. Rockefeller, despite their utterance over a century ago. Be it a privately owned business or publicly listed […]

Read More
T: 01993 772467      E: advice@expertwealth.co.uk

Expert Wealth Management, West Wing, The Old Dairy, High Cogges Farm, Witney, Oxfordshire, OX29 6UN


Your Protection: In the unlikely event of your ever having a complaint which we have not been able to resolve amicably, you have recourse to the Financial Ombudsman Service (FOS). This is an independent body which will investigate complaints at no cost to you.  The FOS website is www.financial-ombudsman.org.uk.