Bloomberg recently posted an article on the worst performing billionaire for the year, which is none other than the 2nd richest man in the world Mr. Warren Buffett. Buffett has reportedly lost $3 billion since the start of the year shrinking his net worth to just over $ 70 million. Shame!
Warren Buffett’s wealth is measured by his shares in the company he founded and still runs today, Berkshire Hathaway. Berkshire Hathaway is a conglomerate of many underlying diverse businesses. The reason this article drew my attention is because during the technology bubble at the turn of the millennium Berkshire Hathaway similarly under-performed the market. Market commentators claimed Warren was too old to understand the new age economy and had lost the plot. Needless to say they ate their words after the tech bubble burst and the overvalued tech stocks, which had driven the stock market, came crashing down. Not holding any tech stocks Berkshire Hathaway’s relative performance was phenomenal.
Another one of my favourite offshore asset managers Orbis have also under-performed the market and peers over the last 12 months, they too avoided the tech bubble of the millennium. I have heard it said, “History does not repeat itself, but it certainly rhymes”, as investors we suffer from “Recency bias”. We have short memories, we project the recent past and expect this to continue into the future, forgetting the lessons we have learnt.
I cannot say whether the recent relative under-performance of Warren Buffet and many other value managers is a repeat of what we experienced in 2000, but I believe caution is warranted particularly if you are basing your investment decision on the recent past performance of your manager.
In their latest quarterly Managers Report Orbis introduced the concept of “trending”, which is illustrated graphically below.
- Insert graph
The graph depicts the correlation of performance over the last 12 months vs. the 12 month prior in respect of those shares, which have been out-performing or in plain English the shares that are doing well have continued to do well. This could be an indication of an expensive share getting even more expensive as the “herd” (wall of cheap central bank money) chases yesterday’s returns.
“Be fearful when others are greedy and be greedy when others are fearful”. Warren Buffett
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