>Warren Buffett: The Oracle of Omaha – Perhaps Not?

Warren Buffett: The Oracle of Omaha – Perhaps Not?

Steve Aucamp, managing director, The Presidio Group
June 8, 2016

Much has been made in the press in the last month or two about several statements Warren Buffett made at his company’s annual shareholder meeting. The gist of his comments was that investors need only invest in a passive S&P 500 strategy to minimize fees and maximize return. This is an interesting statement for many reasons, not the least of which are the following:

  • Buffett himself does not invest this way
  • It ignores the benefits of diversification
  • It ignores emotions

 

Buffett’s investment style – Warren Buffett is the epitome of an active value investor. He buys stock in companies when he believes they are cheap relative to the fundamentals of the business. He refuses to get caught up in the euphoria of the markets, typically shunning stocks trading on momentum. Yet, index investing has attributes of momentum investing. When a few stocks can substantially move the index, they can either mask wider problems, or hide better opportunities, in the market. Some of us are too young to remember the dot-com bust, but that period raised a critical challenge with traditional index investing.

Diversification – It has been mathematically proven that diversification among asset classes can lower the volatility of a portfolio. Unless one has a crystal ball it is difficult to know which asset class will perform best in any given period, and diversification adds protection against being wrong. Solely investing in the S&P 500 ignores that the US is less than 50% of the global GDP, and that number continues to shrink. To invest solely domestically is to potentially miss some of the opportunities that international growth may provide.

Emotions – Finally, Warren Buffett’s comments ignore the Achilles Heel of investors – themselves.  Assume for the moment that Mr. Buffett is correct and that over a 50-year time frame an investor would be better off simply investing in a S&P 500 index fund. Further assume that in the second year of investing this way the S&P 500 loses 40-50% of its value, while other asset classes perform better (some may even make money in that year). How many investors are willing to stay the course during this down period?  Probably not many, and those who sell are creating permanent losses at the depth of the market sell-off, from which it is very difficult to recover.

Some asset classes may be so efficient that it makes sense to invest in an index to reduce fees; but, a fully indexed portfolio may leave money on the table. Like Mr. Buffett’s actions (instead of his words), we believe value can be added in a portfolio through active management focused on the fundamentals of a company. We believe that an investment program built on diversification with a mix of active and passive investing, coupled with a disciplined approach devoid of emotions, will provide a better outcome to the investor.

 

Past performance does not guarantee future results. Investment in securities involves risk and has the potential for partial or complete loss of funds invested.  Diversification does not ensure against market loss. Investors should consult with their financial advisors before investing in any investments.  This is for information purposes only and is not a solicitation to buy or sell any specific investment.

 

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2019-01-17T02:21:29+00:00