Has Warren Buffett lost his Alpha?

by Jeffrey M. Welch

In an article Saturday in the New York Times, Jeff Sommer goes into something of a eulogy of Warren Buffett's career as an investor.

This article seems misguided in a number of aspects, even though its major conclusion for the average investor is spot on (i.e., if you are a normal person, ALL of your investments should be in low-fee highly diversified index funds).

Warren Buffet is not a normal investor, so even though many idolize him, almost nobody could actually imitate him. His success has been based really on two factors:
  1. Finding undervalued companies following Benjamin Graham's now well known strategy of value investing.
  2. In many cases, taking control or at least exerting a degree of control directly over the companies that he invests in.
Most people can follow #1 to some degree, you could always buy a passive value fund in a very simple version. Next to no investors can do #2. Buffett's ability to exert control over the companies has had a huge impact on them, because he is a great businessman. His success isn't just due to picking winners; it is due to finding underdogs and guiding them into position to win.

The article above reports that from 1965-2013, Buffett beat the S&P 500 by an annualized 9.9%. This is a remarkable feat. In my mind, only his ability to intervene and influence these investments can explain his out-sized performance. A simple rule of 72 calculation indicates that this would have resulted in around 6.5x the S&P market valuation over the time in question. Buffett is so far ahead, who cares if he has a few lousy years. Maybe the market is finally catching up a bit.

So back to what this means to you the regular investor: Nothing really.

Buffett is a star, possibly the most successful investor ever, certainly the most successful of the last 50 years. You cannot beat him; you can't really emulate him, so why try. Your best bet is to buy a couple of simple index funds, make sure they have VERY low fees, fire and forget.

Check in every couple of years. That is all.