Just when thousands of Warren Buffett’s fans were celebrating his success in proving how a conservative approach can prove a winner, the Oracle of Omaha has shown that he can surprise the markets with a big share play.
Back in February, Buffett’s Berkshire Hathaway unveiled a US$17 billion purchase of Apple shares – more than 2.5% of the tech giant’s capital – effectively doubling his stake in the iPhone group since this time a year ago.
It’s a reminder that you can’t underestimate the tactics of such a canny investor: he has taken a large bet on an individual stock – and the sort of stock that he has shied away from for most of its listed life.
His more recent headlines have revolved around his long-standing, successful bet with a hedge fund manager that investing in an S&P 500 index fund will out-perform an average of several hedge funds.
In his annual letter to shareholders, Buffett reported that after nine years his 10-year bet was way ahead. His index fund investments had done 7.1% over the nine years of the bet while the hedge funds have managed only 2.2%.
Buffett’s $1 million stake in his S&P strategy would have compounded to a $854,000 profit. For the average of the five hedge funds, the gains would have been only a quarter of that -$220,000.
As Buffett told his shareholders, a number of smart people are involved in running hedge funds. “But to a great extent their efforts are self-neutralizing, and their IQ will not overcome the costs they impose on investors. Investors, on average and over time, will do better with a low-cost index fund,” he said.
Now it’s true, as Buffett’s critics point out, that neither he nor most other billionaire investors made their money from investing in index funds. Rather, they have relied on picking winners among shares.
Which is precisely what Buffett is doing with his massive investment in Apple – in an apparent reverse of previous policies of shunning tech stocks. Why Apple? “Because I like it,” Buffett says disarmingly.
Though he doesn’t own an iPhone (although he does have an iPad – a gift) he says “Apple strikes me as having quite a sticky product.” And, ever the pragmatist, Buffett also didn’t allow his distaste for Donald Trump’s politics to rule his investment thoughts.
Explaining his buying spree in February, Buffett said with interest rates at current levels the US market was cheap. Although he had bought more than $US20 billion in about four months, he said the market was still hard to time and stocks could still plunge.
The market “could go down 20% tomorrow but I’d still be happy because I have been buying good businesses.”
Of course, that’s the attitude of a long-term investor, rather than someone looking short-term. Buffett also believes this chase for short-term gains has cost investors dearly.
In comments that won’t please his fellow billionaires, he blames this on the attitude of wealthy people, who are accustomed to feel that it is their lot in life to get the best food, schooling, entertainment, housing, plastic surgery, sports tickets or whatever.
They feel their money should buy them something superior to what the masses receive. And, Buffett says, this search for “superior” investment advice has caused investors to waste more than $100 billion over the past decade.
Again, he comes back to his conclusion about the high fees managers charge – on the trillions of dollars under management, the out-sized profits will go to the managers, not the clients.
“Human behaviour won’t change,” he says. “Wealthy individuals, pension funds, endowments and the like will continue to feel they deserve something extra in investment advice. Those advisors who cleverly play to this expectation will get very rich.”
He says the likely result is predicted in an adage: “When a person with money meets a person with experience, the one with experience ends up with the money and the one with money leaves with experience.”
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