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:
- 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.
- Who is number 2? Why do we not talk about this person so much?
- 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.