Is Warren Buffett Losing His Edge?

Going from the Oracle of Omaha to ordinary. That’s what a new analysis and the New York Times are saying about the legendary investor, and what they want you to believe about Warren Buffett. As an investor for over the last 50 years, Buffett has failed to outperform the S&P 500 only 10 times. For those unaware, the S&P 500 is a broad basket of stocks, including small and large companies, both growth and value names across several different sectors of the market. You’ve most likely heard of this advice a number of times, which states that you should keep your portfolio diversified. So, when it comes to the average investor, using the S&P 500 as a benchmark makes really good sense. What’s unfortunate for Warren Buffett is that out of the 10 times that he’s failed to miss this benchmark, four of them have happened in the last five years.

Has the 83-year-old head of Berkshire Hathaway really lost his mojo? “He could not be less ordinary in any way,” mentions Jeff Macke in a recent video on Yahoo news. He also added that statistically, it’s nearly impossible for Warren Buffett have such an excellent track record the way that he has.

How unlikely is it?

During the year 2012, a consultant named Charles Ellis looked closely at the performance of mutual fund managers over a number of different periods of time. In any given year, only two of the five managers beat the S&P 500 benchmark. And over a 20 year period, only one in five performed that well. Buffett has been doing this for 50 years. From the years 1965 to 2012, the compounded annual gain of the S&P 500 is 9.4%. Over the same period of time, Buffett’s compounded annual gain was 19.7%.

Still, “Buffett himself knows [the odds are against him],” says Macke. Berkshire Hathaway is much too large for Buffett to really be able to make a dent picking winners and losers on the stock market. Valued at $250 billion, Berkshire Hathaway is the fourth largest stock in the US. Because of this result, Buffett does not have the opportunity to slowly make his way in and out of stocks. He has to take humungous positions in companies and hope that he never has a reason to sell. Sometimes he’ll even buy a company outright.

During 2009, Berkshire Hathaway and Warren Buffett spent a total of $34 billion when buying Burlington Northern Santa Fe railroad. BNSF is the largest company in the railroad related industry, and Buffett was able to pay cash to buy his business. This transaction was a tremendous success. But you must understand that the value of the Berkshire Hathaway stake in the company doesn’t necessarily reflect on measuring Buffett’s returns. Instead, the value of this transaction is measured mainly as a function of the total size of Berkshire Hathaway. This factor is something that individuals do not have to deal with, and it’s a fantastic example of how tracking Warren Buffett against the S&P 500 really doesn’t make a lot of sense the way that it used to.

What does any of this mean for ordinary investors, and are there any lessons that should be learned? “It’s almost impossible to have this quality called alpha, which is the ability to outperform the stock market” says Macke. So it’s highly probable that Warren Buffett still has great advice to share with other investors. The New York Times even offered a bit of his wisdom taken directly from the annual letter to shareholders:

“Put 10 percent of the cash in short-term government bonds and 90 percent in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.) I believe the trusts long-term results from this policy will be superior to those attained by most investors – whether pension funds, institutions or individuals – who employ high fee managers.”

What you thinking? Did Warren Buffett really lose his edge? Or is the Oracle of Omaha going through a dry spell at this point? Are you still going to follow the investing legend’s advice, even though it is not always perfect?

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