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Buffett - No Alpha



October 15, 2010 – Comments (20)

I saw this post, with a pretty graph, showing Warren Buffett's alpha.

 One of the things about investing is that I realize I did as well as I did when I was actively investing because I was managing a relatively small amount of money.  My 100 to 5000 shares, depending on price, was never a price mover whereas if you have huge amounts to invest the price is going up as you buy and coming down as you sell.  My stock purchase were in the $2000 to $20,000 range, with more in the lower range then the higher range.  Well, with managing $200 billion you need to make 10 million trades at the high end of my range. 

The other thing is that Buffett started his investing career early in the population explosion of the 20th century, and pretty close to the bottom in terms of people getting over their fears of the market from the depression.  Those are two enormous things to have in your favor.  Timing is huge, and the population growth the world experienced in the 20th century isn't likely to be repeated.  He was ahead of the boomers in buying his investments and rode the secular bull of baby boomer demographics.  

Long term the opposite has to happen now.  Your employment income streams stop as you enter retirement and you slow down, stop or start pulling investment income, all of which reduce demand and reduced demand reduces prices.  Baby boomer demographics will continue to dominate the economy, imho, and the generation below simply does not have the disposable income to compensate.

20 Comments – Post Your Own

#1) On October 15, 2010 at 10:41 AM, HansHauge (42.28) wrote:


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#2) On October 15, 2010 at 10:58 AM, Seansonfire (41.92) wrote:

Counter Argument:  The Boomers will finally give up their high paying jobs to the younger generations (and thus wealth will be spread over a wider range of ages then it was previously) This will put a higher percentage of the money in younger peoples hands then any previous generation, and thus these people will essentually be richer then the boomer generation because they will have held higher paying jobs for longer periods.  On the agregate of the next generations this will allow more cash to be use for "non-essentials"(housing, insurance, food, etc) leaving more money left over for investment then the baby boomer generation.

Just a thought.

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#3) On October 15, 2010 at 10:59 AM, Seansonfire (41.92) wrote:

This also means Real Estate is going to plummet!

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#4) On October 15, 2010 at 11:11 AM, zCreator (93.55) wrote:

@2) However with the fed injecting endless amounts of dollars and making money worthless. Just to keep up with inflation the boomers will probably have to hold off passing on their jobs quite a bit longer, thus retiring much later because the money they saved can't buy what it used to, so wealth will not be spread to the younger generation any time soon.

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#5) On October 15, 2010 at 11:29 AM, davejh23 (< 20) wrote:

Sean - Where do you work?  When someone retires with 35 years experience, does their replacement with 10 years experience immediately start in the same wage bracket?  I know that's not the case where I work.  In some cases, the replacement may be making 50% of what the retiring worker was making.  They don't have the skills and knowledge that the retiring worker obtained over their 35 years...they still have to advance through our pay scale based on experience...they may not make the same amount in inflation adjusted terms for 10+ years.

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#6) On October 15, 2010 at 11:34 AM, davejh23 (< 20) wrote:

Buffett wasn't always a buy and hold investor.  As you mentioned, he's been forced into that due to the size of his portfolio.  Early on, he had secular trends in his favor, and he was a buy and sell investor that was able to compound those earnings.  Compounding earnings using the same technique will be much harder as those secular trends reverse.

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#7) On October 15, 2010 at 11:41 AM, miteycasey (28.94) wrote:

In 2008 there were 4.3 million births in the USA, the largest in history. The population isn't going to get smaller even in the next decades as baby boomers pass on. I don't think investing in America will die.

One advantage investors today have over Buffett is they can invest world wide much easier. Populations and nations are developing all over the world so you aren' limited to the few thousand American Companies.

I think the advantage Buffett had over everyone one else in his time was information. He aquired it and digested it much better than everyone else. In today's world with the internet 'hidden' information is much tougher to find so if Buffet was just getting started today he'd lose this advantage.

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#8) On October 15, 2010 at 12:00 PM, Seansonfire (41.92) wrote:

Davejh -  Not immediately, but what I am saying is the next generation gets to that higher level sooner then a person in the Boomer Generation did, and thus they will make more money over their career then the boomer did. 

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#9) On October 15, 2010 at 1:01 PM, SkepticalOx (98.56) wrote:

I think miteycasey hit it on the nail. Buffett was legendary for acquiring information, reading financials no other people would dare pore into. He had an information edge. Today, almost every single piece of non-insider information you can get at a click of the mouse, and instantly. 

Also, in the most recent years, stock correlations have been absurdly high (85%?). With all the ETF's out there too, stock-picking the Buffett way may just be a tad harder.

To be an investor focusing on fundamentals, a person may have to focus more on the qualitative size (buying a great business at a reasonable price, instead of an absurdly inefficiently cheap one). 

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#10) On October 15, 2010 at 3:57 PM, BuffettFan99 (< 20) wrote:

The original article is located at (can you correct the link?):

Warren Buffett's Alpha and Returns

It does not say that Warren Buffett does not have positive returns. In fact Buffett had more than 6% annual return in the past 10 years. The article is saying that any value investor could have achieved 6% annual return, that's why Buffett does not have any alpha (or stock picking ability). He still beats the market!!

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#11) On October 15, 2010 at 4:02 PM, SkepticalOx (98.56) wrote:

#10 - Um. Who are you talking to? I think it's pretty clear we are talking about alpha here (outperformance of the market). Regardless, Buffett has stated that shareholders of Berkshire should only expect modest outperformance of the index over the long-term, due to the size of the company. 

Regardless, it's important to note that Buffett still has couple advantages on his side now. He has access to ridiculously sweet deals (the GS and GE 10%-yielding preferred with warrants), as well as the insurance float which is sorta like interest-free margin.

Having too much money isn't exactly a bad problem! 

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#12) On October 15, 2010 at 5:50 PM, Bays (29.13) wrote:

I would love to see Warren Buffet start over with $1m right now.  I would definitely bet money that he'd be just as successful as he was if not more.  I wouldn't doubt his 50% claim for a second. 

He hasn't lost his touch like many idiots have claimed, it's just with the amount of money he is managing, the number of potential companies he could invest in has continuously shrunk from the 1000s to a very tiny selection. 

Of course, I'd agree with SkepticalOX, too much money is a problem I would love to have!

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#13) On October 15, 2010 at 7:23 PM, RonChapmanJr (30.09) wrote:

Wouldn't be anyone special if he started over today. Simply born at the right place, to the right parents, at the right time in history.

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#14) On October 15, 2010 at 7:50 PM, PainterPoker (26.49) wrote:

RonChapmanJr:  When I clicked on the link to your website that you're pushing my mac detected MALWARE.  That's not good.

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#15) On October 15, 2010 at 8:09 PM, TMFFischer (95.47) wrote:

I have to believe that Buffett doesn't focus too much on alpha these days (and maybe hasn't for a long time, his annual letter comparisons aside). He owns/oversees many businesses (not stocks, per se) in the real world, and he has so much wealth that he has all kinds of management issues most of us will never experience. Anyway, I'd find it kind of strange (and in a human sort of way, sad?) if a man of such wealth, means and opportunity (Buffett, Gates, or even any multi-millionaire, let alone billionaire) spent a large part of his time trying to beat a market index. Or made his big goal each year to beat the index. Life isn't a game. Investing isn't a game. I humbly think investing is about gaining enough means to live the life you want, how you want to. It isn't about beating a random index. Once you reach your life goal, the index should mean even less. 

Yes, it's important to measure how you do against a market in general, so you know; but it's more important to be comfortable with how you invest, with the risk you're taking, and to reach the goals you want to reach, however modest or grand they may be. If you're always concerned about racing a index, you're more likely to take on risk just when you shouldn't.... 

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#16) On October 15, 2010 at 8:47 PM, Bays (29.13) wrote:

Simply born at the right place, to the right parents, at the right time in history.

Wow, not given the man any credit at all, eh? 


You have to measure against the index because if you can't beat it, you're better off buying the index. I have seen a lot of people continually underperform the index at the expense of countless hours researching stocks, trading stocks, analyzing charts when they could just sit back, relax and match the return of the index.

Heck, they would outperform about 50% of mutual funds doing that in any given year.  They would outperform probably about 80% of them in a 10 year time period!  And there would be no financial reports to read every quarter.

Of course, you will not get the same thrill or sense of self accomplishment you would get by managing your own portfolio.  Also, you will not be able to brag to your neighbour about how well your index fund did in intraday trading. lol


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#17) On October 16, 2010 at 12:05 AM, throwerw (28.41) wrote:

If Buffett started over with $1 million today, he would load the boat with CCME shares.

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#18) On October 16, 2010 at 12:37 AM, Bays (29.13) wrote:

Nice call, throwerw.  Just checked out some of your blogs on it.


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#19) On October 16, 2010 at 1:00 AM, walt373 (99.87) wrote:

miteycasey, what you say is totally logical and what most people would expect, but I don't really think it's true. You can still get a huge informational edge through better processes and research.

One example is with the company St. Joe (JOE), which David Einhorn recently gave a negative pitch on at the Value Investing Congress. His pitch was so well received that the stock price fell by 20% in the next two days. Note that this company had a market cap of over 2 billion dollars and followed by a lot of value investors. His presentation only contained public information that could've been accessed by anyone, like pictures of the properties owned by the companies and documents for transactions of properties. Yet apparently most people did not know this information before the presentation.

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#20) On October 17, 2010 at 10:20 AM, dwot (29.03) wrote:

Interesting comments...

I am in agreement with walt373's comment that people can get an edge just by researching.  I would say because I was doing so much research and I just wasn't finding much that I liked contributed to my leaving the market in 2007.  Also that I didn't have the same time for it.  But, I was getting very frustrated at the hours I was putting just to find junk and real problems.

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