How can you not love Warren Buffett?

You don’t get to eleventy trillion dollars (author’s estimate) in assets without doing a thing or two right. His TV interviews are consistently entertaining, he has a way of explaining complex financial concepts in very easy to understand terms, and the book written about his life is large, in charge, and is certainly worth a few minutes of your time, especially for the part where Buffett was essentially married to two women for a while. It was more complicated than the typical relationship with the young people these days. “Are we dating? He’s seen me naked four times. Does that count? Ugh, I’m so confused.”

I’ll leave it up to you to figure out who inspired the above “quote.”

NO DISTRACTIONS! I thought it might be the opposite of fun fun if we had a look at Buffett’s investment record over the past 10 years and see how well he’s done compared to the market. Buffett used to invest directly in the stock market for himself and through partnerships he set up with investors, (which were essentially a private hedge fund that Buffett managed and then poured his management fee back into the partnership) but he dissolved such partnerships years ago. Except for his two marriages. HEYO!

These days, Buffett invests through Berkshire Hathaway, which fully owns a bunch of businesses, including Dairy Queen, (delicious) See’s Candies, (also delicious) Fruit of the Loom underpants, (delicious on my ass) and Netjets. (Also delicious. Wait a minute. I’VE BEEN TRICKED.) There are about a million more businesses Buffett has picked up over the years. Here’s a full list.

Warren Buffett goes on TV a lot. Click here to watch some videos of the old guy.

Berkshire Hathaway is an insurance company, meaning they generate a bunch of money from premiums that has to be invested, just in case it’s ever needed to pay out a whole bunch of claims at once. This is called the “float,” and this float gives Buffett a bunch of cash to invest in businesses and individual stocks. The float is a pretty sweet deal, since it essentially works out as an interest free loan.

Anyway, much has been said of Buffett’s record over the past 60 years. But how has it been lately? Let’s have a boo.

From Berkshire Hathaway’s 2002 Chairman’s Letter, here were Buffett’s equity positions at the end of that year.

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If you’ve followed Buffett for a while, most of these names aren’t much of a surprise. He’s had a hard-on for Wells Fargo, American Express, and Coke for years. Gillette was a company he was big on for years too, until it got taken out by Proctor and Gamble back in 2005. Okay, how does that compare to the end of 2012?

Screen Shot 2013-11-21 at 11.33.47 AM

Boom. So Berkshire increased their total holdings from $28.36B to $87.66B over a decade. That’s an 11.9% return. That ain’t bad, kids. It beats the S&P 500 by almost 5%, thanks to this fancy calculator created by the sex muffins over at Don’t Quit Your Day Job.

CASE CLOSED. BUFFETT IS YOUR NEW GOD. BOW DOWN BEFORE HIS HOLINESS.

Well, not quite.

The thing is, Berkshire Hathaway was constantly increasing the float over those years. Meaning, Buffett and team didn’t take $28B and turn it into $87B. There was constantly money coming in. I’m too lazy to try and figure out how much, but let’s just assume they added $2B to the float every year, and see how that affected returns.

Close enough. What's a billion between friends?

Close enough. What’s a billion between friends?

 

The aforementioned calculator puts the S&P 500 total return (including dividends, excluding inflation) at a hair under 7% over that time. Meaning, Buffett only beat the market by 0.5% over that time, and the guy obviously never paid himself a management fee. Well he did, since he got paid, but Buffett’s salary is modest.

Okay, that might have been an imperfect measure. I did pull the $2B a year addition to the float out of my ass, so let’s look at another metric – Berkshire’s book value. Buffett has said himself that Berkshire’s book value is the best way to value the company, and it’s the metric he most often uses. So how has it performed?

Jan. 2003 per share book value: $50,498

Jan. 2013 per share book value: $114,214

Total compounded annual growth rate: 8.50%

Not bad. That’s a 1.5% market beat, a number most money managers would sacrifice a goat to get. But is it good enough to turn the average investor into the next Warren Buffett? Let’s assume the average person buys an index fund, and gets 8% over the years. Buffett returns 9.5%. How will their results differ over the years, assuming a $10,000 initial deposit?

Year     Average Person Buffett        
10 $21,589 $24,782
20 $46,609 $61,416
30 $100,626 $152,203
40 $217,245 $377,193
50 $469,016 $934,772

 

Most people would kill to get 1.5% more than the market. Look at the difference in results if you let it compound for long enough. But, when we look at those results from Buffett’s point of view, we quickly realize that beating the market by 1.5% per year isn’t enough to get an investor to Buffett’s levels. You have to kill the market, and Buffett did in the 60s and 70s, back when he wasn’t so hampered by being so damn rich.

This isn’t entirely Buffett’s fault. It’s much easier to beat the market when you’re only investing a few million. The world of small caps becomes too big once you’re sitting on even $100M, since a 10% position would represent 20% of the value of a $50M company.

Basically, Buffett fell into the same trap that gets a lot of money managers. They have some success, get piles more money, and then have more money than good ideas. So the good ideas get watered down, and returns suffer.

The fact Buffett can continue to beat the market while managing over $80B is remarkable. And yet, because he’s only beat the market by 1% or so over the past decade, his results are a little disappointing. That says as much about Buffett’s remarkable track record as anything. He’s just been so good over the years.

Tell everyone, yo!