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Buffett's Coke Smoke-screen



May 03, 2014 – Comments (8) | RELATED TICKERS: KO , BRK-A

Warren Buffett has been much in the news for neither approving nor voting against Coca-Cola Corporation's new executive compensation plan.  Much was said about his decision to neither approve nor disapprove of the plan. The plan in question involves a few paltry millions of dollars compared against Coke's multibillion dollar annual revenue.  No one gives a darn except the news media, who love to show poor people the amusing spectacle of insanely rich people having a sham disagreement; and the Coke executives, who may have to buy new houses in the Hamptons instead of a new chateau in Tuscany this year.

Let me show you 5 numbers that you're not hearing anything about.  (6.7), (2.1), 2.5, (1.6), (14.2).  These numbers are how much better you did over the last 5 years - 2009, 2010, 2011, 2012, 2013 - by holding Berkshire Hathaway stock instead of a hypothetical investment in a zero-expense, zero-fee, dividends-reinvested S+P 500 index fund.

The numbers in parentheses, of course, are how accountants indicate a negative number.  That's right; Warren - who runs Berkshire Hathaway, of course - lost to the S+P for 4 out of the last 5 years; and the one year he did beat the S+P, it was by a paltry two and a half per cent. 

Let's look at that number another way.  Suppose you invested $100 in each of the two investments in question on Jan 1, 2009.  On December 31, 2013, how much money did you have?

Berkshire stock:   $191.48

S+P 500, div reinvested:  $228.31  

Now that's not terrible performance.  I would have gone home happy to be holding either investment during the time period specified.  But, as we know, 95% of fund managers can't outperform the S+P 500 over time.  Warren has been lionized as being one who can - and last year, justified his continuing underperformance by saying he could beat the S+P over any 5 year period.  Now he's modified his rhetoric, saying Berkshire is optimized to outperform when the S+P is doing poorly - haha!  that's funny, Warren, my own investments tend to outperform when other investments are doing poorly relative to them as well - and he now says BRK will outperform "over any cycle."  

I have a different opinion.  Warren has been lucky for a lot of years; he's been the outlier, the reason binomially modeled experiments need to calculate a p value.  In other words, he's been lucky and now he is experiencing what all lucky stochasts experience - a well-described phenomenon called regression to the mean.

Good riddance, too.  I have had just about enough of a guy worth $60 billion coming on TV and telling me how his secretary pays more taxes than he does, so therefore I and my peers need to pay more taxes.  Smug jackwagon that he is, I'll be happy to see him fade away. 

8 Comments – Post Your Own

#1) On May 03, 2014 at 5:02 PM, ikkyu2 (97.97) wrote:

Now let's respond to some of the anticipated comments:

a)  Too big to succeed:  So's the S+P 500.  It's bigger than Berkshire is.  In fact, 30 of its individually-managed components are bigger than Berkshire is.

b)  Warren's a decent guy:  Sure he is, and in fact I like a lot of what he does and says.  His contributions to the Gates Foundations are among the greatest deeds ever done in the history of humanity, and I don't joke about that.  However, if you're going to argue this point with regard to his ideas about my taxes, start by saying how much more taxes you paid than you owed in 2013.  If the answer is $0 - like Warren - please begin your comment by noting that you have $0 where your mouth is.

c)  If you're so smart, ikkyu2, why ain't you rich:  I am rich.  Next.

d)  I'd rather be lucky than good:  So would I.  There's really no argument there. 

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#2) On May 03, 2014 at 5:07 PM, ikkyu2 (97.97) wrote:

Actually, it's hard to figure out BRK's market cap at any given time.  Maybe only 5 companies have a higher market cap.  BRK's book value is the highest of any company.

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#3) On May 03, 2014 at 5:25 PM, ETFsRule (< 20) wrote:

As Warren said, he is positioned to outperform in hard times - I'm sure we will see evidence of this once again the next time there is a market correction.

If you start your comparision on 1/1/2008 instead of 2009, he is ahead of the S&P by almost 10%. It's rather silly to suggest that he is "fading away" when he has continued to beat the market over the past 6 years.

He's always beaten the market, and he's not about to stop now. If you think luck can explain his long-term performance, then you have a lot to learn about investing.

Stop whining about taxes, no one cares if you're rich, get over it.

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#4) On May 04, 2014 at 2:30 PM, awallejr (28.17) wrote:

1)  Except BRK really is too big.  It gets harder and harder redeploying the cash.  To me this is nothing but a lumbering mutual fund now.  It is Buffett's "toy" until he moves on.  After that then the company should be broken up with oodles of spinoffs creating dramatic shareholder value.

2)  I thought he was being hypocritical on the vote.  It sounded like he was just playing up to the camera.

3)  Well compared to most people in the world I am rich but I probably place top 10% in the US.  And I really don't mind paying taxes I just hate seeing it wasted on corruption.  I have argued many times that to save the middle class we need to go back to the Eisenhower tax table (adjusted for inflation) which will cause me to pay higher taxes I suppose.

4)  Love him or hate him the guy is giving most of it to charity.

5) Sorry but no one can be that lucky for that long a time.  Give the man some credit at least.

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#5) On May 06, 2014 at 12:55 AM, ikkyu2 (97.97) wrote:

I don't agree that spinning anything off from BRK would create shareholder value.  In fact, divorced from Buffett's reasonable management policies, I think companies now under his light-handed guidance would probably do poorly.  I think Buffett's a much better manager than he is an investor - no one would dare overextend themselves with debt under his watch.

I wish I could find something to complain about with his choice of charity or the amounts he is choosing to donate, but like I said, I think his donations are among the greatest deeds ever done in the history of humanity.  His legacy - in public health, in world development, towards equality and prosperity for all people - will last millenia.  It is an inspiration to me.

People can be lucky indeed.  In a stadium of 50,000 coin flippers, who must sit down when they get tails, after 10 flips you expect 10 to still be standing.  You have not discovered the 10 best investors in the stadium by this method - or, given that lifespans are finite, have you?

I'm surprised more Buffett worshipers didn't creep out of the woodwork.  No one reads these blogs anymore, I guess.  

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#6) On May 06, 2014 at 9:32 AM, awallejr (28.17) wrote:

I didn't say people can't be lucky.  I am saying Buffett's lifelong investing was not controled by luck.  Luck has nothing to do with doing due diligence.  And one of the important metrics for Buffett when buying a company is the quality of its management so it would not follow that these companies would flounder if spun off.

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#7) On May 06, 2014 at 12:43 PM, Valyooo (35.29) wrote:

If you think he has just been lucky, what makes you think you're good enough to invest?

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#8) On May 07, 2014 at 12:08 PM, ikkyu2 (97.97) wrote:

Oh, I'm not sure of that at all, Valyooo.  Never have been sure.

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