The often quoted Warren Buffett makes his move to buy Amazon after admitting to missing out on Amazon and Alphabet last year. The news gives Amazon a nice little 3% boost today. How has Berkshire Hathaway done?
All and all, better than I expected considering his big misses throughout the last 20 years. The power of leverage! Below is a 10 year chart of BRK-B vs S&P. (Cropped for legibility)
Brett Arends over at Market Watch writes..
“Winning with leverage
Number-crunchers at the Greenwich, Conn.-based hedge-fund company AQR Capital Management say they’ve found the secret to Buffett’s past investment success. In a nutshell: He bought low-volatility, high-quality stocks with borrowed money. (Berkshire was typically leveraged 1.7 to 1, they said). Beyond that, they calculated, Berkshire’s so-called “alpha,” or investment outperformance, was “insignificant.”
They added that Berkshire’s wholly-owned companies didn’t even perform as well (https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3197185) as the publicly traded stocks it bought, so it didn’t have a lot of internal management magic either.
Well, maybe. And even if they’re right, this strategy has been enough to make Buffett a fortune estimated at $89 billion (https://www.forbes.com/profile/warren-buffett/#7eee42d34639) and many of his stockholders millionaires.
The question is whether, looking ahead, Berkshire is likely to be a better investment than, say, a basket of quality U.S. stocks.
Food for thought: Berkshire has already underperformed the MSCI USA Quality Index, which tracks the stocks that meet various financial “quality” measures. And that underperformance isn’t only over five years. It’s over 10, and even 15, years.
Berkshire’s up 250% since 2004. The MSCI USA Quality index? Try 350%. And that’s without the benefits of leverage.”