Warren Buffett versus similarly leveraged S&P 500

by philg

From an email discussion group of hedge fund/bond fund managers….

I get the Financial Analyst’s Journal as part of my CFA registration. The attached article [“Demystifying Buffett’s Investment Success”] investigates the extent to which Berkshire Hathaway “beat the market”. It has significantly outperformed the S&P 500, especially before about 2000. Warren is called the “Oracle of Omaha”. This author finds that the return has been higher on his ownership of public companies (where he owns a stock we all could buy) than on the private companies. He concludes that this raises doubt that he has a superior management style and incentives. I am not sure I agree with that conclusion. He also said that BRK has debt, so you need to compare his return with a stock portfolio that is 170 percent of its equity, through leverage. That and a couple other factors pretty much explain his success. I guess that is good news, because it should be possible to keep it up when Warren eventually steps down.

In other words, the correct benchmark for Berkshire Hathaway is not the S&P 500, but rather a leveraged S&P 500 (since the trend for this index has been up, especially following the election of King Donald, the leveraged index outperforms the basic index).

Separately, is now a good time to buy Berkshire Hathaway? We’ve had some great years for the stock market so it seems as though the good times are due to end. Berkshire Hathaway was able to scoop up some great deals during the last panic (2008-2009).

7 thoughts on “Warren Buffett versus similarly leveraged S&P 500”

  1. Also in the news, Bezos to divorce and wife to get half of his $140 billion:
    https://www.dailymail.co.uk/news/article-6573485/Amazon-CEO-Jeff-Bezos-novelist-MacKenzie-Bezos-getting-divorce.html

    Best comments:
    “She’s not in it for the money. If she was, she would have waited until he hit a Trillion.”
    “I wonder if he’ll have any trouble finding a significant other.”
    “She has one problem, she will never know if anyone she meets now will only be after her money”
    “Perhaps they can get a quick divorce through Amazon Prime.” Response: “Amazon Prime NOW”

  2. USA Today, 01/09/19 – Amazon CEO Jeff Bezos and wife MacKenzie to divorce after 25 years of marriage

    https://www.usatoday.com/story/money/business/2019/01/09/amazon-ceo-jeff-bezos-wife-mackenzie-divorce-after-25-years/2523544002/

    “Amazon CEO and founder Jeff Bezos says that he and his wife MacKenzie are divorcing after 25 years of marriage…

    The couple met at management investment firm D.E. Shaw in New York City and married in 1993, six months after MacKenzie asked him out to lunch, according to a Business Insider profile of their marriage.

    A year later, they moved to Seattle to found Amazon, where she became an accountant and one of the first employees for the then-Internet bookseller. Until five years ago, she dropped Bezos off at work in their Honda after they took their four kids to school.

    Since then, Bezos became the world’s richest man, supplanting Microsoft co-founder Bill Gates on Forbes’ annual list of the 400 richest Americans three months ago, with his net worth rising to $160 billion, up from $81.5 billion a year ago.

    MacKenzie Bezos became a novelist, winning an American Book Award for her 2005 debut novel “The Testing of Luther Albright.” Subsequently, she released the book “Traps” in 2013.

    It’s unclear whether the couple had a prenuptial agreement…

    Crisis management expert Juda Engelmayer said the split “will be about money, and it’s not going to be about control of the company.” …”

  4. I’d be hesitant to add equity of any kind right now. The U.S. has reversed QE and is now doing QT. I think the ECB, starting this month, has stopped its QE. That leaves only BOJ doing QE, but not enough to offset the Fed’s QT.

    It is likely that the main reason the indexes are higher now than they were in 2009 is because of the fake liquidity pumped in to the system by QE. I want to see how the market handles the QT.

    On a longer term perspective, this is an interesting presentation by Raoul Pal about the demographic and debt headwinds facing the market over the next couple of decades:
    https://m.youtube.com/watch?v=5OFaZcC0lRU

  6. anon: Thanks for that link. “Sanchez, 49, – who also works as a helicopter pilot” is interesting!

    https://people.com/movies/who-is-lauren-sanchez-dating-jeff-bezos/ has more on the, um, helicopter mom. It says “She earned her helicopter pilot’s license in June 2016 and created Black Ops Aviation, an aerial film and production company. … The pilot was also hired to film aerial shots for Bezos’ company Blue Origin, according to Page Six.”

    The FAA’s Airmen Registry (sexist!) shows that a “Wendy Sanchez Whitesell” in Beverly Hills has a Private certificate with ratings for airplane single-engine land and rotorcraft-helicopter with a Third Class medical. https://en.wikipedia.org/wiki/Lauren_S%C3%A1nchez says that the gal’s full name is “Lauren Wendy Sánchez”. So if this is indeed the same person it would be illegal for her to actually work as a pilot.

    https://blackopsaviation.com/ says the company is “female owned and operated”.

    Stepping back, though, I think the MacKenzie Bezos story does show the critical importance of choosing a jurisdiction. Divorcing Jeff Bezos in a variety of European countries would yield essentially nothing, assuming that a “separate property” checkbox had been ticked prior to the marriage. Child support would be capped at $2,000 or $6,000 per child. It would be considered “justice” for her to keep whatever she managed to get, on a current basis, during the marriage. Yet here in most U.S. states it would be considered “unjust” if she does not get a substantial portion, perhaps the majority, of the assets that Jeff Bezos accumulated.

  7. Your comment about buying Berkshire seems to contradict the point that Warren’s investment success is simply a product of leverage, rather than his ability “to scoop up great deals.” Also if his results can simply be accomplished through leverage might as well just take a similarly leveraged position in the S&P — rather than doing it indirectly through Berkshire. I think in recent years, say the last 15, his results have been about in line with the S&P. The advantage with Berkshire is not Warren’s stock picking (that might have been an advantage decades ago) , but that he does not pay out dividends so the money compounds, rather than a big portion being handed to the taxman & because Warren is Warren we know he will not squander or steal the retained earnings so we are happy to let him retain all of the profits at the corporate level.

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