CEO’s annual letters to shareholders are a bit like having your teeth drilled: something most of us prefer to avoid. Warren Buffett’s annual reports to shareholders of Berkshire Hathaway are very different: they are a good read for any investor wishing to understand his steadfast approach to value investing.
In this year’s letter Buffett apologizes to shareholder that his next annual letter may show that, for the first time, his fund will under-performed the S&P index over a five-year period. This will occur because returns for 2008 will drop out of the five year period 2009 to 2013. The S&P index plunged in 2008 while Berkshire’s NAV fell only modestly. In 2009 the S&P rallied, recovering much of the loss, while the Berkshire portfolio did not regain the value it had never shed—hence the apparent ‘under-performance.’ >>read the letter
It is surprising that Mr. Buffett is judging his investment skill based relative performance, over—what in his view—is a relatively short time-frame. Remember Mr. Buffett has often said his preferred holding period for stocks is forever.
Like Buffett, we follow the value investing approach developed by Ben Graham in the 1920′s. What is surprising to us is how few other investment managers follow this well established and highly effective approach. Many managers appear to believe that complexity sells: they hold large numbers of stocks, trade frequently, engage in complex transactions involving options and derivatives, charge high fees and deliver poor performance.
In our view, the key to value investing is not getting caught up in the current noise of the day. Unfortunately it is this key discipline that too many investors fail to apply. DALBAR Inc., a U.S. research firm, compared actual investor returns with market returns. Their study found that while the S&P 500 has returned 8.4% over a 20 year period ending in 2008, the average equity investor earned just 1.9%, which was less than the inflation rate of 2.9%.
With over three decades of experience, we have found that our three-part value investment strategy is the best way to reduce risk and volatility and earn consistent returns over time. Our diligent, patient and opportunistic approach has served our clients well, through good and bad markets.