Why Warren Buffett Is Not A Poster Child for Active Management

Many proponents of active management often cite Warren Buffett as the poster child for how active management can work. Whether Buffett’s performance is due to luck or skill or some other factor (it could have been luck for a few decades until he became known for his track record at which point everyone now buys what he buys simply because of his track record – this would be neither a luck nor a skill issue but rather a matter of influence) is a topic of debate for another time. For now, let’s assume we definitively know it to be due to skill.

If this is the case, then the following observations need to be addressed by those who use him as a reason/support for active investment management:

  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?
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 6 comments
  • heyheywhatcanisay

    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).

    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.

    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?

    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?

  • The Biz of Life

    Anyone citing Warren Buffett’s record as a justification for active management doesn’t understand Warren Buffett’s investment philosophy and should be ignored immediately. By the way, class B shares were introduced in 1999, but split this year in conjunction with the Burlington Northern purchase.

    Some Buffett quotes:

    We believe that according the name ‘investors’ to institutions that trade actively is like calling someone who repeatedly engages in one-night stands a ‘romantic.’

    I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.

    Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it.

    Only when the tide goes out do you discover who’s been swimming naked.

    Our favorite holding period is forever.

    When a management team with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.

    We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.

    Time is the friend of the wonderful company, the enemy of the mediocre.

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