If Buffett Were a Fund Manager
If you were to ask investors who is the greatest investors of our time, Warren Buffett’s name would be at or near the top of everyone’s list. Buffett’s two great contributions have been that he has taught investors to have a value approach and that he has preached the importance of patience and discipline, avoiding the noise of the market. The latter contribution is evident among Berkshire Hathaway (BRK) shareholders, who have a “religious” belief and confidence in him.
An interesting question is: How would Buffett be viewed if, instead of being the chairman of Berkshire Hathaway, he ran an open-end mutual fund by the same name? Would the same Berkshire shareholders who religiously hold their shares have the same patience and discipline? Before answering, consider the following:
- From 2009 through June 2020, BRK returned 9.3%, underperforming Vanguard’s 500 Index Fund (VFIAX) return of 13.7% by 4.4% per annum for 11.5 years. And it did so with greater volatility: annual standard deviation of 16.0 versus 14.6. A $10,000 investment in BRK would have ended the period with $27,671. VFIAX’s total return was 58% greater.
- In the more recent period from 2017 through June 2020, BRK returned 2.6% versus 11.9% for VFIAX. Over this period the volatilities were virtually identical. The total return difference was 9.5% (BRK) versus 48.3% (VFIAX).
In my 25 years of experience as an investment advisor, I have learned that one of the greatest mistakes investors make is that when it comes to judging performance, they treat three years as a long time, five years as a very long time, and 10 years as an eternity. Given that BRK has underperformed for more than a decade, if Buffett were a fund manager, many investors would have bailed, just as they bailed on Bill Miller (former chairman of Legg Mason Capital Management, now part of ClearBridge Investments), the only fund manager to ever beat the S&P 500 Index 15 years in a row (1991-2005). When that streak ended, as the following table demonstrates, his performance deteriorated.