and one ax they typically are seeking to have ground is their
adherence to the Efficient Market Hypothesis, the notion that stocks
are always reasonably priced because all information about all companies
is immediately dispersed to the general populace, and the
general populace is composed of equally intelligent, rational individuals.
One person who harbors doubts about Buffett’s abilities is
Larry E. Swedroe, an advocate of index funds and the author of
What Wall Street Doesn’t Want You to Know (New York: St. Martin’s
Press, 2001).
He professes himself to be an “agnostic” regarding Buffett.
Certainly Buffett’s long-term record is impressive, Swedroe admits,
and it may have three causes:
1. He may be a genius.
2. He may have been just lucky.
3. He may have benefited specially from his being an active participant
in companies he buys into, such as Coca-Cola and
Gillette. “He often takes an influential management role, including
a seat on the board of directors, in a company in which he
invests.” So it may be his contribution to the companies in
which he invests that explains his record.
(One might add: Another explanation someone might advance is
that Berkshire has used the float from its insurance company premiums
to compound its returns—at little or no cost. This, observes analyst
Braverman, is akin to Buffett’s having used leverage, or
borrowing money.)
Swedroe continues: From 1990 to February 29, 2000, Berkshire
gained 407 percent. But that was only 0.2 percent per year
more than the S&P 500. Swedroe then does some data mining,
and, he admits, searches specifically for periods of time when
Berkshire Hathaway under-performed. From June 19, 1998, its alltime
high, to February 29, 2000, Berkshire fell 46 percent. The S&P
500 rose 24 percent, not including dividends. From 1996 through
1999, Berkshire rose by 75 percent. But the S&P 500 climbed by
155 percent.
The lesson from Buffett’s record, Swedroe concludes, is that
“choosing active managers, even perhaps the greatest one of all, is
no guarantee of better results.” Whereas diversifying among index
funds, he argues, is.
The obvious answer to Swedroe is that the 1990s were a great time
for the S&P 500 Index because technology stocks ruled the roost, especially
in the last few years of the decade, and the S&P 500 was
dominated by its tech stocks. For Berkshire to have beaten the index
by even a small amount over that period of time is impressive, considering
Buffett’s aversion to technology stocks. And the fact that
Berkshire endured some mediocre years and some poor years is not
surprising; the S&P 500 has suffered dry spells as well. In any case,
value stocks are notorious for trailing behind the general market
during long time periods, which might explain why value investors
wind up being so generously rewarded.
Read More : Buffettology or Mythology?
