Response to reader comments on Warren Buffet not being a poster child

A reader left a comment on yesterday’s post that I thought was worth responding to for everyone to see. The post was titled “Why Warren Buffett Is Not A Poster Child For Active Management”. Click here to read the original post. Here were my original three questions posed in the post. I’ll re-post the reader’s comment after, and then respond:

  1. Jack Bogle reported that the average mutual fund turnover rate in 2000 was 90%. Buffett makes few transactions per year. Is Buffett a fair proxy for all active managers? His style is uniquely different from the vast majority of managers.
  2. Who is number 2? Why do we not talk about this person so much?
  3. Why don’t more people own Berkshire Hathaway stock?

Reader’s Comments and My Responses

1. Just because he is non-traditional (funny how buy-and-hold value investing is non-traditional) compared to other active investors, this discredits him from being a good example of successful active investing? I really can’t see how you got from point A to point B on this one. I would think that NOT exhibiting a herd mentality would be a beneficial trait as an investor (active or passive).

I think you missed my point, or I wasn’t clear (wouldn’t be the first time). My point was not that Buffett is a bad example of successful active investing, but rather he is a poor proxy for active management in general (especially the type promoted to retail investors through the majority of actively managed mutual funds or ETFs). His style is quite different from many retail mutual funds that are actively managed. I agree with everything else you’ve said here.

2. #2 in what? Market Cap growth over a decade? Most followed? Most Cherry Cokes consumed? I think you should probably name your metric before complaining about not knowing the #2 ranking according to that metric.

“Who is the #2 poster child for active management?” is what I meant.

3. Maybe because Class A shares are trading at $120,000 a share as I write this, and the cheaper class B shares were only introduced this year, to allow BRK.A investors to give shares as gifts?

Class B shares were first issued in 1996 at 1/30th the price and 1/200th the voting rights of Class A shares. They split on a 50-1 basis in January of this year, they were not introduced this year. There has been plenty of time to access BRK. Also, don’t discount the purchasing power of investment funds to act on behalf of smaller investors. A better response would have been to say that the market believes that Buffett cannot provide high returns with more and more money.

It seems like a lot of people assume that Passive investing is smarter than Active, and try to work backwards from that assertion. Could it be that it’s not so black-and-white?

You are correct – it’s not so black-and-white. However, perhaps you should read this (a link to Nobel Prize winner William Sharpe’s paper The Arithmetic of Active Management can be found here too). I don’t know if the passive proponents are the ones making baseless assumptions. Just as an FYI, I use both passive and active strategies in my own portfolio. I tend to write more about passive strategies and products, no doubt, but I’m not anti-active by any means. Just pontificating.

Preet Banerjee
Preet Banerjee
...is an independent consultant to the financial services industry and a personal finance commentator. You can learn more about Preet at his personal website and you can click here to follow him on Twitter.
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Showing 14 comments
  • heyheywhatcanisay

    Thank you for your tactful response. After re-reading your original post, I see the point you were trying to make and I agree. BRK is pretty much in a class of their own, and it’s not fair for actively managed funds to ride its coattails.

    I was clearly incorrect about the B class shares. I should have done my homework on that one, I was looking at http://www.nyse.com/about/listed/brkb.html and saw the listing date of 21 Jan 2010. It looks like that was the date of the most recent split, which makes sense in hindsight.

    I enjoy reading your site and look forward to more great posts in the future.

    • Preet

      Thanks for the question. Keep ‘em coming! :)

  • Robert

    Here are two more problems with holding up Warren Buffett as a poster child (despite his age). First, mutual funds have special challenges due to fund flows that Buffett does not. Second, it is impossible to deduce how much of a role luck has played in his success. I admire him very much, but I don’t know that I can learn from him. Having said that, Sharpe’s Nobel prize doesn’t impress me, after LTCM proved CAPM wrong.

    • Preet

      Yes, there are quite a few structural reasons that other managers cannot mimic Buffett. I think I’ve heard of him referred to as a 5-sigma event, and given that there are millions of investors some could argue he exists because he “has” to exist. There should be a handful of investors with similar, and perhaps better, long term performances (they may not have kept their money in all the time though). They could also statistically be due to luck. We’ll never definitively know, although my gut tells me that in his case there is tremendous skill.

  • Thicken My Wallet

    My mantra about Buffet has always been the guy bought and operated businesses for a long time before buying stocks. He’s not your typical active manager who graduated straight from MBA then worked at an i-bank. He probably understands better than most how a business operates beyond the balance sheet giving him a distinct advantage over “mere” mutual fund managers.

    • Preet

      Not to mention that he exerts great influence on the direction of companies as a board member. How many fund managers do that?

  • Tiny Potato

    Great posts as usual.

    Another thing to consider with Warren Buffet is the advantage of scale. He has in the past engaged in many transactions that most ordinary investors would not be able to participate in (underwriting options contracts, bailing out banks by injecting equity, etc.)

    His stock market picks (Coca Cola, etc.) can be followed, but there are many other transactions he has access to due to his wealth and scale.

    • Preet

      Like his special deal with Goldman? :)

      Yes, another good point.

  • Financial Cents

    Good stuff Preet, hard not to be a Buffett fan. Cheers.

  • D comfort

    hi there, i want to know if a regular income fund, such as the cibc income fund, which returns capital for the year in the way of (a) dividends paid out and, (b) return of capital, and, (c) other income; -is the return of capital portion which is not subject to tax and therefore does not increase the taxable dividend portion on an individuals’ tax return worth considering when it really is just ekeing out a return of your own moneyover the years the fund is held, even though ‘tax efficient’. If one is able to invest the cash directly in two dividend paying stocks, and receive the dividends directly, and the potential for capital gains, is this not more worth while then something being sold as a diversified, tax efficient’ manner of distributing income? Thanks, i would appreciate your answer.

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