Monday, October 7, 2013

Far be it for ME to "rain on Warren Buffett's parade," but ...

I was struck by a front page story in today's Wall Street Journal titled "Buffett's Crisis-Lending Haul Reaches $10 Billion." But it was actually the summary under "What's News" that initially got my attention: "Buffett's investments during the financial crisis have brought in $10 billion, a pre-tax return of nearly 40%."

Now, to read "40%" would get anyone's attention, except for one thing: there's something missing! And what's that?

TIME! Over what time period was this return realized? The past day, week, month, year, five years?

A return without time
is worthless.

I became suspicious when I read that a loan of $4.4 billion "is expected to net Berkshire a profit of at least $680 million." Sorry, but I'm not really that impressed with these numbers.

We find the following chart included in the article

which highlights six of the companies Mr. Buffett invested in during the crisis. We see the amount invested as well as the profit (from dividends and appreciation). On the surface, to make $9.95 billion on a $25.20 billion investment seems great, but without the element of time, what's the point?

And so, I decided to do my own analysis on the statistics provided. I calculated the cumulative and annualized returns for each investment, and compared them with the S&P 500 for the same period; and what do we see?

With all due respect to the Sage of Omaha, these returns are not terribly impressive. Unless I am missing something, for each investment the S&P 500 did better; in some cases, MUCH better.

An important point regarding my numbers: they start with the month end value for the S&P prior to the month of the initial investment and end at the end of September 2013. If profits were realized much sooner, then these returns would have to be altered. But not knowing this information, I carried it through the end of last month. Are my numbers perfect? Of course not, as I am missing some key information, but they at least do something that is critically important: include the element of time.

We can never lose sight of the fact that with returns we need the associated time to be included, too, otherwise, it's a meaningless statistic. Just as to hear that some baseball player has a certain number of home runs, without knowing the length of time it means zip!

p.s., in addition to time, a benchmark is also critically important, to fully gauge the success of one's investing.


  1. Excellent analysis. Too few read past the headlines. Perhaps this is how we have so many investment "sages." I'm no fan of Mr. Buffett, but to be fair let's also include his own statement that supports your conclusion presented here.

    "In terms of simple profitability, an average investor could have done just as well investing in the stock market if they bought during the panic period," Mr. Buffett said in an interview Saturday. He was referring to a monthslong stretch beginning in the fall of 2008 when the stocks of some of his favorite companies, including Wells Fargo & Co. and American Express Co., fell to historic lows. "You make your best buys when people are overwhelmingly fearful."
    But few investors, if any, capitalized on the crisis as expertly.

    I guess that another insight to be gained is that most of the time, investment success is more a matter of "allocation" than it is "selection."

  2. Thanks, and as always, greatly insightful comments. I particularly liked Buffet's "Be fearful when others are greedy, and be greedy when others are fearful." The story of JFK's father selling out when he got investment advice from the guy who signed his shoes is an example of this.

  3. Your point about time being a factor is of course correct. Buffett received perks beyond these cash rewards, however, which are incomparable to your benchmark investing in the S&P. As an example, from the article: "Berkshire also owns equity stakes in the firms, or warrants to buy them, that add several billion dollars more to the company's return on investments, at least on paper."

    Also, there's a plausible belief that had Berkshire NOT helped these banks, the S&P would not have fared as well since. So some of Berkshire's (and everyone's) returns in other areas are likely directly attributable to these actions. Given the S&P's local minima around the 2008-2009 period when most of this activity happened, I'd say it's difficult to second guess.

    Lastly, investing $25 Billion in the S&P all at once would have its own unpredictable effects, and without much say in the actual management of the underlying securities (which Buffett almost certainly was given input into), so it's difficult to compare the two returns from a risk and ownership perspective.

    But yes, the numbers in the bar chart alone, particularly when time is taken into account, is uninspiring. Good catch.

  4. Chip, thanks for commenting. The article is a bit ambiguous, perhaps, in its characterization of dividend and premium income," that latter which I interpret to me capital gains (or at least appreciation). There is much more wrong here, as it doesn't include all these investments, and they are not over the same amount of time. Yes, of course, Buffet investing in anything automatically causes it to jump (as the article points out) and his contributions were no doubt part of the market's overall appreciation, at least to some extent. My belief is that the article is a bit hyperbolic, lacking the details necessary to properly assess the success that was realized.


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