compare your investment abilities with buffett?
2024-08-31
한어Русский языкEnglishFrançaisIndonesianSanskrit日本語DeutschPortuguêsΕλληνικάespañolItalianoSuomalainenLatina
(the author of this article is wu zhijian, founder and ceo of wufu capital)
all retail investors who are keen on picking stocks in the u.s. stock market can actually ask themselves this question first before making their own investment decisions: how do my stock picking and timing abilities compare to buffett's?
why do i say that? this is because any retail investor can choose to buy berkshire hathaway stock or decide to invest in the stock themselves. if they choose the former, it is like giving their money to buffett to invest on their behalf.
i believe that few retail investors are arrogant enough to think that they are better than buffett. this is mainly because people speak with performance. what is commendable about buffett is that his investment performance is publicly available. based on this alone, most of the so-called investment legends in the world cannot do it. for example, from the beginning of 1965 to the end of april 2024, the annual return of the s&p 500 index was 10.2%, and the annual return of berkshire hathaway's stock price during the same period was 19.8%, which is about twice that of the s&p 500 index. assuming that berkshire hathaway stock is worth 1,000 yuan at the beginning of 1965, by the end of april 2024, this 1,000 yuan will become about 42.55 million yuan.
some readers may say that it is too long to compare the accumulated performance from 50 or 60 years ago. i was not born at that time, and it is impossible to go back to the 1960s to invest. but in fact, even if we look at the past 10 years, the performance of berkshire hathaway's stock is still quite good. for example, from august 23, 2014 to august 25, 2024, the annual return of berkshire hathaway's stock was 12.8%, exceeding the annual return of the s&p 500 index (10.98%) during the same period. although the degree of excess is not as high as the 1960s and 1970s mentioned above, considering the higher effectiveness of the stock market in the past 20 years, it is actually much more difficult to beat the stock index for more than 10 years than in the last century.
it is worth pointing out that buffett has repeatedly advised retail investors in public to give up stock picking and timing, and to be content with buying and holding the s&p 500 index fund for a long time. however, buffett's own investment method is full of stock picking and timing.
for example, we can look at the current investment composition of berkshire hathaway.
data source: sec, bloomberg, data based on the second quarter of 2024, berkshire hathaway market value based on august 15, 2024
assuming that berkshire hathaway's market value is $100, then about $29 is in cash. in other words, buffett did not invest all his money, but only invested about 70% of his money. the most accurate way for us to judge any investor's optimism or pessimism about the market is to look at his holdings. this data is more convincing than anything he says. from the proportion of cash held by buffett, it can be seen that he has reservations about the us stock market. there are many reasons behind this. it may be that he feels that the current market valuation is too high, or there are no stocks worth buying that he likes, or other reasons unknown to outsiders.
in addition to cash, about 39% of berkshire hathaway's market value comes from its controlled operating subsidiaries, such as its insurance business and energy business. these operating businesses have been operated by berkshire hathaway for many years and are truly long-term investment operations. they are unlikely to be traded as non-operating investments.
excluding the above two, the remaining 32% is buffett's investment business. among them, the stocks with the heaviest positions include apple, bank of america, american express and coca-cola. considering the size of berkshire hathaway, buffett's investment in stocks is not too many, and the concentration is very high. this is also one of the investment philosophies he often emphasizes: if you decide to pick stocks, you should adopt a strategy of fewer but better, deeply study the industries you are good at, and choose a limited number of stocks.
in fact, the only way to beat the s&p 500 is to dig deep and find a few stocks with outstanding performance while keeping a 30% short position. in other words, if buffett wants to continue to maintain his excellent investment performance and continue to beat the market, he has to select stocks that can significantly beat the market and buy them at relatively low points and sell them at high points.
a good example is apple, a major holding in berkshire hathaway's investment portfolio. in the first quarter of 2016, when apple's stock price was around $30, buffett made an important decision to invest $1 billion to buy apple shares, accounting for about 1% of apple's circulating market value at the time. after that, buffett continued to increase his holdings, and by the first quarter of 2024, berkshire hathaway held about 5.8% of apple's shares. at this time, the share price of apple's stock had risen sharply to nearly $200 per share, bringing buffett a rich return. however, in the second quarter of 24, buffett suddenly decided to reduce his holdings of apple's stock by 50%, which surprised the market. from this series of operations, it is not difficult to see that buffett not only selects stocks, but also often chooses the timing of operations. on the one hand, he emphasizes the importance of long-term investment. for example, his holdings of coca-cola, american express and other stocks have lasted for decades, but on the other hand, buffett is not restricted by the philosophy of long-term investment. when making decisions to sell stocks, he does not hesitate and sells when he wants to.
by studying buffett, we can draw an important conclusion, that is, it is much more difficult to beat the market and achieve better investment performance than the s&p 500 index than most people imagine. any ordinary retail investor is far from being comparable to buffett in terms of investment team knowledge and experience, information and capital advantages, or brokerage and bank relationships. therefore, it is almost impossible to obtain excess returns that exceed the market index. as the saying goes, knowing yourself and the enemy will lead to victory in every battle. the first step for smart investors is to recognize their own strengths and weaknesses, play to their strengths and avoid their weaknesses, and insist on being a rational investor rather than a gambler.
(this article only represents the author's personal views)
