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Has Warren Buffett lost his edge?

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From Oracle to ordinary, or at least that’s what the New York Times and a new analysis of legendary investor Warren Buffett would have you believe. In his 50 or so years as an investor Buffett has failed to outperform the S&P 500 just ten times. The S&P 500 is a broad basket of stocks that includes companies large and small, both value and growth names across several different sectors. You've heard the advice a thousand times - keep your portfolio diversified. So for the average investor using the S&P 500 as a benchmark makes perfect sense. Unfortunately for Buffett, of the very few times he's missed that benchmark, four of them came in the last five years.

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So has the 83 year old Berkshire (BRK-A) chief lost his mojo? “He could not be less ordinary in any way,” says Jeff Macke in the attached video, adding that it is statistically near impossible to have the track record Buffett has had. How unlikely? In 2012 consultant Charles Ellis looked at the performance of mutual fund managers over various periods of time. Two out of five managers beat their benchmark in any given year. Only one in five had that kind of performance over twenty years. Buffett is going on 50 years. From 1965 - 2012 the S&P 500 had a compounded annual gain of 9.4%, Buffet's was 19.7% over the same period.

Still, “Buffett himself knows [the odds are against him],” Macke says. Berkshire Hathaway is too big for him to be able to make a dent picking stock market winners and losers. At $250 billion Berkshire is the fourth largest stock in the United States. As a result, Buffett isn’t able to inch in and out of stocks. Instead he takes enormous positions and hopes to never have to sell, sometimes buying entire companies outright.  

In 2009 Buffett and Berkshire Hathaway spent $34 billion buying Burlington Northern Railroad. Burlington is the biggest company in the railroad industry and Buffett was able to pay cash. It was a tremendous success but the value of his stake in Burlington isn’t directly reflected on measuring Buffett’s returns. Instead the value is measured only as a function of Berkshire’s total size. That’s not a factor individuals have to deal with and is a good example of how tracking Buffett against the S&P 500 doesn’t make as much sense as it used to.

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So what does this all mean for investors who are ordinary and what lessons are there to be learned? “It’s almost impossible to have this quality called alpha, which is the ability to outperform the stock market,” Macke says. So perhaps the Oracle of Omaha still has some great advice for investors up his sleeve. The New York Times offered this pearl of wisdom taken from Buffett’s most recent letter to shareholders:

Put 10 percent of the cash in short-term government bonds and 90 percent in a very low-cost S.&P. 500 index fund. (I suggest Vanguard’s.) I believe the trust’s long-term results from this policy will be superior to those attained by most investors — whether pension funds, institutions or individuals — who employ high-fee managers.

What do you think? Has Buffett lost his edge or is he just going through a dry spell? Will you still follow the advice of such a legendary, if not always perfect investor?

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