Warren Buffett Has Not Generated Any Alpha In 10 years (Great beginning, then flatlined)

Business Insider ^ | 10/14/2010 | Insider Monkey

[WebFocus]

Warren Buffett. We could jot down the nearly endless list of descriptives that would just begin to protray his followers’ feelings towards him. But it’s time consuming, so let’s just put this as a constant: He’s The Man.

We know.

But let’s just explore this a bit further. Ordinary investors follow every step Warren Buffett makes. But so do the seasoned professional money managers. They even invest their clients’ funds in Berkshire Hathaway stock. Everybody knows that if they had invested $1000 with Warren Buffett back in the day, they would have been a zillionaire today. We can’t go back in time and invest in Warren Buffett’s investment vehicle, Berkshire Hathaway stock, but we can invest today. But does it make sense to invest in BRK today? Can Warren Buffett generate alpha today, like other smaller hedge fund managers like David Einhorn, Bill Ackman, or Dan Loeb?

Your source for free real-time insider trading data, Insider Monkey, analyzed the returns of Warren Buffett’s Berkshire Hathaway between 1977 and 2009. We ran hundreds of regressions to calculate Warren Buffett’s alpha(skill) for every single month, using both 5-year and 10-year historical performance data. The results based on 10-year data are smoother but paints the same picture as the results based on 5-year data. Contrary to the general perception, Buffett has not had any alpha for the past 10 years. Let us repeat that: Buffett, no alpha, for the past decade. You would have been better off if you had invested your money with David Einhorn. (Technical note: We used Carhart’s four factor model and French’s factor returns to calculate Buffett’s alpha).

[WebFocus]

[Red Badger]

Alpha? as in brain waves?.................

[WebFocus]

Of course, you know that Alpha is a term used by investors and traders in the financial world.

Alpha is a risk-adjusted measure of the so-called active return on an investment. It is the return in excess of the compensation for the risk borne and is used to assess a fund or financial managers’ performances.

[sinanju]

This sounds totally new-agey and suspicious.

All they say here is “Alpha(skill)” wouldn’t return on investment be better stated more conventionally?

[Alberta's Child]

Stories like this remind of all that nonsense about those "Beardstown Ladies" a while back. Turns out they weren't any more astute at making investment decisions that a child.

I've long suspected that Warren Buffett has made a lot of prudent investment decisions in the past, and that right now he's kind of living off a reputation that was earned years ago.

He's not a young man anymore, and I'm not sure anyone could be expected to keep up a winning track record for a very long time.

[sinanju]

So it’s a highly specialized metric. Does it also include fees charged by the fund in question?

[Frantzie]

I have been telling people this for a long time. Great study and post.

Warren Beuffett is a smart man but he is a crooked POS. Small town boy makes good. Well his daddy was a (Repub) Senator from Nebraska.

He knows how to play the float with insurance company premiums.

[Frantzie]

Seth Godin published the Beardstown Ladies book. He is a internet marketing guru and Harvard grad.

He never cheked their data and anyone with a high school diploma and a calculator could have realized the old ladies had no clue on how to calculate gains and losses. The book was a big seller and a total scam. Another con man like Buffett.

[sinanju]

Or a business model or a unique set of opportunities that he grasped and that will not come again.

Seems like Buffet became famous overnight when Berkshire went public and he became a paper billionaire. Seems like we’ve been hearing more about his mistakes ever since.

[Alberta's Child]

I think his traditional approach to buying stocks holds up well, in general. I just don't know how closely he's followed that original model of his.

Buying and holding stocks that pay good dividends is not a bad investment strategy, especially in light of the abject idiocy we saw in the 1990s when companies that made no profits whatsoever were reaching absurd valuation levels just because ignorant investors insisted on buying their shares.

[WebFocus]

RE: Does it also include fees charged by the fund in question?

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NO. These returns are measured without fees being considered (since you really do not know what fees one manager will charge compared to another).

[ArmedConservative]

BRK (both A & B shares) are up +25% YTD.

I can live with that.

I may not care for his politics, but I have enjoyed the last 20 years I have been invested in Berkshire Hathaway.

[Wuli]

Well, maybe he did, or maybe he didn’t provide much “alpha” over the last decade; but, a pertinent question potential investors look at is, O.K. what was Buffets “alpha” against some broad measure like the S&P or the Dow, etc. (seems to me they are no further ahead than they were a decade ago).

For many, many elderly people, smart elderly people, they are no longer seeking to make a “killing” in “the markets”; they just want to do a decent job of preserving what they have, minus what they need to spend from what they have. I think they are a big part of Berkshire Hathaway (BH) investors and I imagine their steady dividend checks and stable capital positions has them satisfied. They may not have vastly improved their positions in the last decade, but neither have they lost their shirts or their nest-eggs in BH.