I stand second to none in my admiration for Warren Buffett's
talents at increasing shareholder value. (E.g., "I'm not saying
that Buffett's genius isn't worth the premium -- obviously it
is.")
Further, I would like to add that based upon Roger Lowenstein's
full length biographical portrait, "Buffett", a more
fundamentally decent human being is hard to imagine. The man is
a credit to the whole human race.
However, my point was: "... for the average investor to attempt
to emulate Buffett's methods is like the average player of
weekend pickup games trying to imitate Michael Jordan's. It may
improve your game -- but I doubt that it will get you into the
big leagues."
For example, Robert Hagstrom, author of the "Warren Buffett Way",
wrote (p. xii), "Some critics argue that, despite his success,
Warren Buffett's idiosyncracies [I prefer the term "genius"]
prevent his investment approach from being widely adopted.
[Nothing prevents their wide adoption; the question, though, is
what would be the efficacy?] I disagree .... I will argue that
his methodology, once understood, is applicable to both
individual and institutional investors alike."
Alas, the proof of the pudding, as they say, is in the tasting.
Robert Hagstrom wasn't just making an idle claim. He started his
own mutual fund to prove his point, Legg Mason Focus Trust
(FOCTX). (See: biz.yahoo.com ). After a
very rocky start, FOCTX has pulled ahead of the S&P 500's
annualized three-year return by 1.34%.
Compared with other funds, this is a noteworthy achievement.
But, it doesn't remotely approach BRK's excess returns of
approximately 40%+ annually over a similar span. And, it's not
just because Buffett is now famous. Buffett outperformed the S&P
500 by double digit margins from his first year.
Further, considering the FOCTX's management fee is 2% annually,
about 60% of the excess returns have been consumed in expenses.
Bogle would be very skeptical that this fund could overcome a 2%
annual drag, versus Indexing, over the long term. So am I. Of
course, one could avoid the fee by trying it on one's own. But,
alas, time is money. Could the additional 2% be netted without
the time commitment Hagstrom has made?
As Lowenstein points out, Graham would not permit Buffett to
introduce his methods into the last edition of "The Intelligent
Investor", because, contrary to Hagstrom, Graham did not feel
they could be adopted by the average investor. Indeed, towards
the end of the book, Graham sheepishly admits he hadn't an
inkling of GEICO's true Intrinsic Value when it was introduced to
him. Simply put, if Graham didn't see it, I wouldn't have
either.
Buffett, by contrast, pulled GEICO back from bankruptcy a second
time, in the mid-1970's, after the stock had fallen from 42 to
2-and-change. Buffett modestly says, "What [I] do is not beyond
anyone else's competence." [Ibid.] I beg to differ: It's
beyond mine.
So, to all of you, especially Wayne, who had the prescience to
ignore Buffett's warning that BRK was fully valued at 40,000+, I
salute you. But, as the television ads caution, "Do not try this
at home" -- without first checking with Robert Hagstrom.
Reynolds Russell
web.idirect.com
"There are no sure and easy paths to riches in Wall Street or
anywhere else." (Benjamin Graham)
"'All things excellent are as difficult as they are rare.'"
(Graham, quoting Spinoza) |
