Warren Buffett Is One Stock Picker Who Believes He Can Still Beat the Market
February 26 2017 - 7:37PM
Dow Jones News
By Nicole Friedman
Warren Buffett was dismissive of professional money managers in
his widely read letter to Berkshire Hathaway Inc. shareholders. But
the billionaire reasserted his belief in his own ability to pick
winners and losers.
"Every decade or so, dark clouds will fill the economic skies,
and they will briefly rain gold," he wrote in the letter, which was
released Saturday. "When downpours of that sort occur, it's
imperative that we rush outdoors carrying washtubs, not teaspoons.
And that we will do."
The prediction that Berkshire would be ready to profit from the
next downturn was one of several active-management assertions from
the 86-year-old investor, who became one of the world's richest
people due to bets on cheap stocks and companies. Mr. Buffett
signaled a willingness to sell longtime Berkshire holdings and
declared Bank of America Corp. to be undervalued.
It is an approach that is no longer in vogue in the
asset-management world as investors seek out cheaper funds that
mimic market indexes while retreating from managers who promise to
beat the market. Investors pulled a net $342.4 billion from
U.S.-based actively managed funds last year, according to
Morningstar, while pouring a record $505.6 billion into U.S.-based
passively managed funds.
Mr. Buffett himself recommends that investors use low-cost index
funds rather than placing their money with active managers that
charge higher fees. More than $100 billion, he said in his letter,
has been wasted on bad investment advice over the last decade. He
also declared victory in a $1 million bet with another asset
manager that an S&P 500 index fund would outperform a basket of
hedge funds over a 10-year period.
"He's certainly not saying that there are no...Warren Buffetts
out there, " said Roger Lowenstein, author of a biography of Mr.
Buffett and a director at mutual fund Sequoia Fund Inc. "What he's
saying is that the average investor is not going to do better than
average."
Mr. Buffett is one of the world's most successful active
managers. From 1965 through 2016, Berkshire's market value rose at
a compounded annual gain of 20.8%, compared with 9.7% for the
S&P 500 including dividends. Berkshire doesn't pay dividends --
another sign of Mr. Buffett's confidence in his investing
abilities.
Berkshire now owns so much that its overall holdings, which
include retailers, utilities and manufacturers, are often seen as a
proxy for the overall U.S. economy. Its 2016 financial results,
which were also released Saturday, revealed that certain industrial
businesses are slowing.
Berkshire reported that its earnings for the year were basically
flat -- $24.07 billion, compared with $24.08 billion in 2015. That
was largely the result of disappointing results for its railroad,
which struggled due to slowing demand for coal.
Berkshire's book value, a measure of assets minus liabilities
that is Mr. Buffett's preferred yardstick for measuring net worth,
rose 11% in 2016. But that was less than the 12% total return in
the S&P 500, including dividends.
Berkshire's huge insurance operations and investments did well,
helping to offset weakness in its industrial operations.
Within Berkshire, Mr. Buffett has doubled down on his actively
managed approach. Berkshire hired two investment managers, Ted
Weschler and Todd Combs, who rely on the same value-oriented,
long-term approach that Mr. Buffett uses. Messrs. Weschler and
Combs are expected to take over management of Berkshire's entire
portfolio once Mr. Buffett steps down.
Berkshire has long profited from Mr. Buffett's willingness to
hold some stock positions, including Wells Fargo & Co.,
American Express Co. and Coca-Cola Co., for years without selling
them. But he noted in the letter that anything could be up for
sale, raising questions among some Berkshire followers about
whether a meaningful holding could be under scrutiny.
"It is true that we own some stocks that I have no intention of
selling for as far as the eye can see," he wrote. "But we have made
no commitment that Berkshire will hold any of its marketable
securities forever."
Berkshire bought large stakes in Apple Inc. and four major U.S.
airlines in 2016, all of which have risen in recent months. The
holdings came as a surprise, because Mr. Buffett has previously
shunned technology stocks and criticized airlines as losing
investments. The company also sold most of its stake in Wal-Mart
Stores Inc. last year.
In another signal of his active-management approach, Mr. Buffett
singled out one holding, Bank of America, for praise and said
Berkshire would convert its preferred Bank of America shares to
common shares if the bank raised its dividend enough.
While Mr. Buffett remains active in his stock picking,
Berkshire's stock portfolio has grown less important to its overall
performance as he has added more companies to the conglomerate.
"Berkshire is no longer primarily in stocks," said Lawrence
Cunningham, a law professor at George Washington University who has
written about Berkshire. "What...readers can learn from Warren
these days is less about value investing and stock picking than
about corporate culture and management organization."
(END) Dow Jones Newswires
February 26, 2017 19:22 ET (00:22 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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