I am 100% certain that I will never personally have as much money as Warren Buffett, nor will I ever come close.
I am probably deep inside a little jealous, but I write this article on the weekend of his annual meeting in Omaha to highlight how beholden many people are to an image, and as a result they choose to ignore the details that are necessary to make sound investment choices.
I feel compelled to write this because I often witness people idolizing Buffett as Trekies idolize captain Kirk at Star Trek conventions.
What would you think of an investment manager who, based on his track record of returns, had an equal chance of losing 27% of your money in the next 12 months as he did making 43% (95% confidence) and in 47% of those months you lost money (last 10 years)?
Would you think that money manager was very good? Would you think that manager was risk averse?
Looking deeper at that money manager, what if you saw that over the last 5 years the return range was –33% on the low side and +37% on the high side, while again 47% of the months you lost money?
Would you still believe that this was the "greatest portfolio manager in the world?"
The Berkshire Hathaway/Warren Buffett audited numbers don't lie.
Who makes the case to question Buffett as an investment "oracle"? It's easy to make, especially when you start comparing his returns to the S&P 500 and the Russell 1000 value index. You will see that in just about every statistical investment measure -- rate of return, standard deviation, Sharpe ratio, downside capture ratio, etc. -- these unmanaged indexes did significantly better.
Just to be clear, over the last 5, 7 and 10 years, Buffett has underperformed in returns, and took significantly more risk and had a much greater dispersion of returns -- which is what gives most people sleepless nights.
Some will read this and think I have a grudge against Buffett. I don't. I just think far too many people blindly invest a significant portion of their wealth in his portfolio without truly understanding the volatility they are absorbing.
Think of Buffett as a good value stock manager. All portfolios should hold a variety of different asset classes, and large-cap value stocks, which Berkshire Hathaway is classified as, should represent no more than 15% of the whole.
Buffett is a great marketer. Unfortunately his returns just don’t support his image. The real genius behind Warren Buffett, and the main reason he has such wealth, is this: he stays fully invested and has done so for a very, very long time.
Now that is a lesson we can and should learn from the Oracle of Omaha.