If the New York Times is to be believed, Warren Buffett has lost his magic touch. In recent years his Berkshire Hathaway has supposedly turned in a sub-par performance, and investors would be better off switching to a plain index fund.
So at least says Salil Mehta, who was quoted approvingly and at length in yesterday’s Times article. Described as “an independent statistician with deep experience in Washington and on Wall Street,” Mehta formerly served as director of analytics in the Treasury Department for America’s $700 billion troubled asset relief program.
The Times may be in awe of Mehta but I’m not. Unless I’ve missed something, Mehta’s analysis provides no support for the Times's heading, "The Oracle of Omaha, Lately Looking a Bit Ordinary."
Mehta is vague about what he is measuring but it would appear that his only complaint is that Berkshire’s share price has underperformed in recent years. Mehta cites in particular the last five years. Measured from end-2008 to end-2013 Berkshire’s share price was up a mere 84 percent, whereas the S & P 500 index was up 104 percent. That might be a useful criticism if the underperformance reflected disappointment with Berkshire’s fundamentals. In reality, Berkshire’s profit performance was an absolute stand-out: earnings per A-share rocketed from $3,224 to $11,850 – an increase of 268 percent. Even after stripping out one-time effects from the realization of capital gains and losses, underlying earnings were up 149.9 percent – a far better performance than the S & P. It is important to understand that earnings is the most appropriate measure of Buffett's performance. This is because so much of the business consists of wholly owned subsidiaries or at least of stakes in outside companies that are so large that they are accounted for on an equity basis.
Essentially if Mehta has a complaint, it is about market irrationality: the real culprit is surely Mr. Market, an allegorical figure invented by the famous investment author Benjamin Graham and often cited by Warren Buffett. In Graham’s rendering, Mr. Market is a manic-depressive who sometimes pays far too much for your shares and sometimes will sell you shares at a huge discount. The job of an intelligent investor is to take advantage of Mr. Market’s wild mood swings. The evidence is that Mr. Market placed a higher valuation multiple on Berkshire’s earnings five years ago than today. But nothing in the real world justified his change of mind and no useful conclusions can be drawn from his idiotic flip-flopping.
Buffett's stock-picking continues to outsmart Mr. Market -- and by a wide margin. It is important to understand that, in Buffett's own words, Berkshire's intrinsic value "far exceeds" its stated book and the difference has "widened considerably in recent years."
Like everyone else, Buffett does make an occasional mistake, of course, but few of his decisions over the years have shown any evidence of declining powers. By his own admission his worst mistake was an investment in a shoe company as far back as 1993. More recently he came to regret a major investment in Conoco at a time of high oil prices. To be set such mistakes, he has scored a massive success with Wells Fargo, which is now his biggest holding. Meanwhile Coca-Cola, now his second biggest, continues to justify the confidence he placed in it when he first bought in as far back as 1988.
At 83, the Sage of Omaha still has many more years ahead of him as one of the greatest investors in history.
