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Is Warren Buffett Losing His Edge?

Written By Brian McKinney, CFP® and G. Thomas Watson, CFA, CFP® August 6, 2019

Warren Buffett. Whether you are a day-trader, or you don’t know the first thing about the stock market, odds are you have heard of him. Arguably the world’s most famous investor of all-time, he is best known for his uncanny ability to pick stocks for the company he acquired more than 50 years ago, Berkshire Hathaway.

Whenever he is featured live on one of the major news outlets, Wall Street, financial advisors, and even the general public give their attention to listen.But, since the end of the 2008 financial crisis which marked the beginning of the current bull-market, Warren Buffett has lagged the S&P 500. How much exactly?

That is because over extended periods of time, Warren Buffett has proved he can beat the United States stock market. For instance, since 1991 Berkshire Hathaway Inc has outperformed the S&P 500, providing an annualized return of 14.52% for its shareholders compared to 10.23% for the S&P 500 index (including dividends, per Morningstar, Inc.).

Though, since the end of the 2008 financial crisis which marked the beginning of the current bull-market, Warren Buffett has lagged the S&P 500. How much exactly? Well, from March 2009 to June 2019, Berkshire’s performance has lagged the S&P 500 by nearly 2.5% per year (15.98% vs 13.53% annualized). What may be even more eye-opening is the performance difference since the start of 2019. Including dividends, the S&P 500 is up 18.54% through the first two quarters, versus just 4.04% for Berkshire Hathaway’s stock price. Many investors are starting to wonder what is causing the underperformance. Though, the answer is quite simple; value investing, which Buffett has utilized throughout his career, has severely lagged growth-oriented stocks over the past few years, and especially since 2008.

Warren Buffett’s Investment Philosophy

Warren Buffett’s investment philosophy is not unknown to the general public. His goal is to find high-quality value stocks that are selling at what he believes to be a discount and offer a “margin of safety.”  Since studying under Benjamin Graham, a professor at Columbia Business School and a pioneer of value investing, Mr. Buffett has employed a long-term approach to investing. In fact, he once noted in his must-read annual letter to shareholders that his favorite holding period is “forever” when investing in outstanding businesses.

Staying the Course

When investing over long time-horizons, there is bound to be extended periods of disappointing underperformance, even in your own portfolio. Take, for example, Buffett’s rolling 10-year performance history dating back to 1988. According to the study performed by UBS’s Chief Investment Office, Buffett has outperformed the S&P 500 index in nearly 90% of rolling 10-year timeframes. However, he has only outperformed roughly 60% of rolling 3-year timeframes.  Investment research firm, Morningstar, has also provided similar analysis on the propensity for some mutual funds to underperform their benchmark for extended periods of time.  Through their extensive research in “How Long Can a Good Fund Underperform its Benchmark?”, they discovered funds which had outperformed over a 15-year measurement period also underperformed for an astounding 9 to 12 years, on average, at some point during the period. These studies are eye-opening and a great reminder that long-term investing requires not only patience, but a very strong conviction in one’s investment process to be able to stay the course during the inevitable period of underperformance.

A value investor’s patience has certainly been tested for the past ten years. According to some analysts, the discount currently offered by value stocks relative to growth stocks is near all-time highs. As we’ve seen in the past, the tide can change quickly. In 1999, growth stocks beat value by more than 27%, but after the tech bubble burst in 2000, value returned 30% more than growth stocks the following year (performance-based on Russell 3000 Growth and Russell 3000 Value indices, per Morningstar, Inc.). Therefore, it is important to make sure you have an allocation to both growth and value stocks in your portfolio.

Investing requires long-range thinking, and putting too much emphasis on the performance of your investments over a short period of time can derail your investment game plan. While Warren Buffett may be underperforming in the short-term, his long-term approach and philosophy suggests he has not lost his edge.

This material is intended for informational purposes only and should not be construed as investment advice. Please contact your financial professional for more information specific to your situation.”

S&P 500: Standard & Poor’s (S&P) 500 Index tracks performance of 500 widely held, large-capitalization US stocks. All indices are unmanaged and investors cannot actually invest directly into an index. Unlike investments, indices do not incur management fees, charges, or expenses. Past performance does not guarantee future results. Asset allocation programs do not assure a profit or protect against loss in declining markets. No program can guarantee that any objective or goal will be achieved.