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Why Warren Buffett Is The Most Overrated Investor Ever

August 20th, 2014

warren buffetBillionaires Portfolio:  The media loves Warren Buffett. But little do people know, Buffett is not the best investor ever. In fact, Buffett’s Berkshire Hathaway Inc. (NYSE:BRK.A) stock is not even a good investment.

Here’s why …

Myth#1: Warren Buffett has the best long term track record of any investor ever.

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Reality: Carl Icahn has averaged 27% annualized over the past 50 years. That compares to Buffett’s 19.8% over the same period.

Myth#2: Buffet is conservative, a great risk manager.

Reality: In investing, when you should get properly rewarded for taking risk. Berkshire Hathaway Class B stock, dating back to 1996, generated an annual compound rate of return of 10.2%. The S&P 500 returned an annualized 8.2% return over the same period. But Buffett took a lot more risk to achieve these returns!

Buffett’s standard deviation (a measure of how volatile a fund’s returns are) is 22.4 percentage points higher than that of the S&P 500.

So, by investing in Buffett, you took on TWICE as much risk, to get about a 1/4 more return than the S&P.

Compare this to activist hedge fund manager, Dan Loeb of Third Point . Loeb has averaged 25% annualized since 1996 with a standard deviation or volatility of 14.8%. In comparison the S&P 500 returned 8.2% with a standard deviation of 19.2% during the same time period. So the S&P is giving you less than less than half a unit of return for every unit of risk you take. Meanwhile, Loeb gives you 1.6 units of return for every unit of risk taken. To put it simply, he has tripled the S&P 500′s returns, and he has done it with less risk.

Now, let’s talk about Buffett and his max drawdowns. I’m talking about peak-to-trough drawdowns on your money if you invest with what is thought to be (sold to be) the greatest investor of all time.

Buffett’s Berkshire Hathaway Class A Shares lost a whopping 51% between 2007-2009, a 49% loss between 1998-2000 and a 37% loss in 1987 and 1989. Simply put if Buffett were running a hedge fund or trying to start a hedge fund today he would be out of business.

Why do drawdowns matter? First drawdowns are a part of investing. So is volatility. But, as I said, you want to find investments that offer you the ample return for the risk you take. In terms of drawdowns, you have to consider going into an investment that you may enter or exit at any point along the path of the investment managers long run growth of investor capital (the equity curve). You could frankly have an unlucky birthday and enter at point along Buffett’s investing history that is at a high. And then you could be forced to exit at a point along that investing history for a particular reason (illness, kid’s college, etc). That’s why volatility of returns and drawdowns matters. When you consider a scenario like this, you put yourself at far greater risk investing with a manager that gives you deep drawdowns and wild volatility, without giving you the ample return to compensate for it.

So, who are the best investors?

The hedge fund industry is wildly misunderstood by the media and mainstream investors. You typically get an immediate cringe when the words hedge fund are mentioned are because they are perceived as “risky”.

Nothing could be further from the truth. In fact, hedge funds are designed to reduce risk, and largely, as an industry they do. They are far better investments than the S&P 500. And far better than mutual funds.

Why? Because hedge funds only exist if they can prove to generate good “risk-adjusted” returns. That means they only survive if they can give you ample reward for each unit of risk they take. In fact, typically they are held to a standard of at least generating 1.5% return for every 1% of risk.

Bill Ackman of Pershing Square has one of the best risk adjusted returns of any investor in the last 10 years. He has averaged 21% annualized, with just two losing years (2008 -12%, 2011 -2%). His standard deviation 15%. That’s well below the S&P 500′s 19%. But Ackman has almost tripled the S&P 500′s returns with 26% annualized. So triple the return with less risk. That crushes Buffett.

Starboard Value, one of my favorite hedge funds, has returned 16% annualized since 2002 versus a 6% return in the S&P 500. Starboard Value’s historical standard deviation is 14.4% versus 19.5% for the S&P 500. So as an investor in Starboard, you get double the return of broader stocks with less risk. Again, that crushes Buffett.

And consider this: Hedge funds report net returns. So the numbers I’ve mentioned above are all after the 2% management fee and 20% incentive fees they charge. When you piggyback their stock picks, you don’t pay these fees. So your returns can be actually higher.

For instance, Bill Ackman’s gross returns are almost 30% annualized. Starboard Value’s returns are 20% annualized. And Dan Loeb’s returns are 32% annualized.

To put this in perspective $10,000 invested in Dan Loeb owned stocks since 1996 would now be worth more $2 million today — $100,000 invested in Dan Loeb owned stocks since 1996 would be worth $20 million dollars!

Please don’t miss the opportunity to learn more about me and how we follow Billionaire Investors into stocks by visiting the Billionaires Portfolio.

william meadeWritten By William Meade From The Billionaires Portfolio

The insider behind the Billionaire’s Portfolio is William Meade. William started his career with Wood Asset Management. Wood Asset Management was a $1.5 billion dollar institutional asset management firm and hedge fund, founded by Gary Wood, a former Goldman Sachs Partner and Harvard MBA. At Wood, William helped manage equity and fixed income portfolios for major university endowments, Fortune 500 pension funds and super high net worth clients (including 2 billionaire families).

Next, William was Director of ETF and Mutual Fund Research for Zacks Investment Research in Chicago. At Zacks, he worked with the founder Len Zacks, a PHD from MIT, in developing and maintaining a proprietary model that ranked over 20,000 ETFs and mutual funds. This model was viewed and used by over 150,000 people monthly, and was published in US News and World Report, and featured on CNN, Yahoo Finance, and Fortune.com.

William received a Masters in Economics from Johns Hopkins University, including PhD level coursework in International Economics. At Johns Hopkins, Mr. Meade was taught by Economists from The Federal Reserve and Department of Treasury. While at Johns Hopkins Mr.Meade consulted for a top hedge fund in Washington DC.


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