There are no public investment funds that are managed as patiently as were Berkshire Hathaway’s early portfolios.
Every investment manager admires Warren Buffett. Yes, Berkshire Hathaway BRK.Ahas outgrown its glory days, becoming so large as to become, effectively, a market surrogate. But what a wonderful stretch! While technically a conventional company rather than a registered mutual fund, for four decades Berkshire Hathaway demonstrated to all observers--investors, investment professionals, and academics alike--that active managers could reliably beat the indexes.
Of course, while every manager desires Buffett’s results, most do not mimic his investment approach. Concentrated, low-turnover portfolios are not for everybody. There are, however, two dozen U.S. stock mutual funds that could reasonably be called Berkshire Hathaway hopefuls. They have large-value or large-blend investment styles, fewer than 25 stock positions, and annual turnover of less than 50%.
Their collective results stink. The logic sounds good. Having portfolio managers use their research to best effect by investing only in their favorite ideas, then limiting the fund’s trading costs by holding those securities for the long haul, would seem to make sense. But things do not play out that way.
Here are the most recent numbers, through Aug. 31, 2016.
That’s awful--not merely disappointing, not merely bad, but terrible. Of those 25 Buffett-hopefuls, two have beaten Vanguard Total Stock Market Index VTSMX during the trailing three-year period, three are ahead for five years, and four are ahead for 10 years. (Things look even worse when those funds are compared against Berkshire Hathaway itself, which even in its relatively enfeebled state outgained every single Berkshire wannabe during the five-year period and all but two of them for 10 years.) Conversely, there are plenty of conspicuous losers. For example, eight of the funds place in their Morningstar Category’s bottom decile for the trailing five years.
In an inaugural blog, John Hempton of Bronte Capital attempts to explain the problem. If you wish to be the next Warren Buffett, argues Hempton, then you really need to act like Warren Buffett. And that means extreme patience. Writes Hempton:
Buffett has often said, “I could improve your ultimate financial welfare by giving you a ticket with only twenty slots in it so that you had twenty punches--representing all the investments that you got to make in a lifetime. And once you’d punched through the card, you couldn’t make any more investments at all. Under those rules, you’d really think carefully about what you did, and you’d be forced to load up on what you really thought about. So you’d do so much better.”
The imitators, states Hempton, fail because they don’t “even come close” to that level of inaction. “Several big-name so-called Buffett acolytes have made more than three to five large investments in the last three years, and at prices that can’t possibly meet the twenty punch-card test. Most phony Buffett acolytes have been turning stock over faster than that.” Every manager who invokes Warren Buffett is fibbing--“Every last one of them.”