The Flinchum File
Thoughtful Economic Analysis and Existential Opinions

A Good Guy and/or Great Investor

07/29/2020

From my first investment course many years ago, I’ve known Warren Buffett as a legendary investor.  I learned he was clearly one of the best investors of all time, if not the best.

However, from 2009 through last month, he has under-performed the S&P by 4.4% each year.  More recently, that under-performance was even worse from 2017 through last month, when he under-performed by a whopping 9.3%.  What?  It would be so easy to conclude he has lost his touch.  Of course, it is always easy to be wrong.

Buffett was mentored by Benjamin Graham, who drilled him on the relationship between price per share and value per share.  Eventually, investing separated into the value-style of investing and the growth-style.  Generally speaking, companies can use their profits to pay dividends to their shareholders (value-style) or use their profits to build their business for their future (growth-style).  The two styles tend to alternate in performance, with growth-style outperforming during strong economies and value-style during weaker economies.  Well, that’s the theory anyway!  (This year, growth-style has grown 13.9% YTD, while value-style has lost 12.8%.)

Since the Global Financial Crisis (GFC) in 2008/9, the growth-style has consistently outperformed the value-style.  (That says more about the depth of the GFC than the superiority of either style.)  Unfortunately, this put Buffett at a huge disadvantage, as he is a value-style investor.  Because of this style issue, it is probably more correct to say Buffett is NOT the greatest investor of all time but is the greatest value-style investor.  Sooner or later, value-style will again beat growth-style, and Warren will look happy again!  Be patient . . .

Besides, how can you NOT like any 89-year-old guy who drinks five cans of Cherry Coke every day?

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