As the old adage goes, “You come at the king, you best not miss”
- Omar Little, The Wire
In 2021, enthralled by rank stock speculation, the media returned to a familiar refrain that occurs every time there is a bubble: that Warren Buffett is over the hill and has lost his touch.
We wrote about this in our piece, Fast Growing Stocks & Profiting from Patience, in February 2021. That piece explained that history had repeatedly vindicated Mr. Buffett’s method of investing after every bubble. Our conclusion then was that this time was no different.
Let’s think back to the internet bubble. If you had invested $1 each in both Berkshire and the S&P 500 in 1995, by the peak of the internet bubble, your Berkshire investment would have risen 126% to $2.26. Your investment in the S&P would have soared 193% to $2.93. You can see this in the first set of bars in the chart below. From 1995 to the peak of the dot.com bubble, Berkshire underperformed the S&P 500 by about 70%.
But roll the clock forward three years after the internet bubble broke. By 2003, that same $1 investment in Berkshire would have risen 197% to $2.97, while your S&P dollar would now only be up 104% to $2.04. This is the second set of bars in the middle of the graph below.
What a difference three years make. From 1995 – 2003, Buffett nearly doubled the S&P500 return.
Kailash believes that we’re currently in the middle of a similar arc. From 2011 to 2021, $1 invested in Berkshire would have risen 188% to $2.88. In contrast, $1 in the S&P 500 during the same timespan would have risen 256% to $3.56. You can see this in the last two bars on the right below. Once again, Buffett was lagging by ~70%.
As we’ve discussed in prior work, we believed in 2021 that Berkshire would march higher and the S&P 500 would begin to wane. As we write in 2022, we already see that prediction coming true. See the chart below:
On the left, you see the same 10-year performance on the far right of our first chart, which shows Buffett trailing the S&P 500 by ~70%. It ended in Feb 2021. On the right two bars above we update the figures through October 2022.
Just twenty months later, Buffett went from lagging the market by 68% to just 17%. To us, this is just another sign that the mean reversion from speculation to actual investing is underway.
As Buffett has shown time and time again, slow, steady, and SAFE - wins the race. We expect Mr. Buffett’s legendary Berkshire Hathaway will soon surpass the S&P 500 over the full cycle.
Dr. Sanjeev Bhojraj is a portfolio manager and co-founder of L2 Asset Management. He is widely published in journals in finance and accounting and specializes in behavioral finance. Dr. Bhojraj is a Chaired Professor in Asset Management and the co-director of the Parker Center for Investment Research at Cornell University’s Business School. He has a Ph.D., ACA, ACMA, and B.Com.
Matt Malgari is a portfolio manager, Managing Member, and co-founder of L2 Asset Management. Matt spent 14 years at Fidelity Investments as an Assistant Portfolio Manager on its $70 billion Diversified International Fund, sector analyst, diversified analyst, and trader. In 2010, Matt became the Managing director of Equity Research for Knight Capital Group. He received his MBA from Cornell University and a BA from Middlebury College.
© Kailash Concepts Research, LLC
© Kailash Concepts Research
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