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Famous Investor's Real Money Record vs. Buy and Hold

When deciding whether or not to invest in a particular fund, or to follow the advice of some advisory service, there is that concept that what you really need to do is take a look at the long-term record of its management and to give much greater consideration to the management with the longest record of good performance. Really good idea? Maybe not so much.

If you've yet to read the prior post "Real Vs. Hypothetical", I do hope that you to get around to it. In it I explain, among other things, that if you're picking and choosing funds based on their performance history, that... hey... that's what I do. Well, I do it dynamically, and you are probably planning to do it statically— buying into the fund and holding the position. But the similarity is that I too rely on actual real-money long-term histories, over at least a decade or so. The similarity may end there, as I do lots and lots of quantitative analysis and hypothesis testing so as to achieve a program with favorable but not unrealistic expected return and volatility characteristics. A full disclosure of what I do is to be found here.

I just want to point out that while you may well do quite OK with the approach of relying on good long-term performance histories, what you are really doing is still a lot like rolling the dice. Past out performance, even long-term past out performance, need not continue. Regime change happens and actually did happen, for example, in about the year 2000: see the chart in this post for an example of that. Regime change can mean that a manager's way of choosing investments won't work any more.

Take a look at the chart below, which shows two performance histories, percentage changes since May of 2003. For both records the percentage gain is about 260% over 14 years. Not bad. And the two performance records look about equal with regard to percentage gain and volatility, but really they aren't quite equal. The security RSP pays dividends that are not shown on this chart; BRK.B pays no dividends so what you see here is all that you would have gotten.

Berkshire Hathaway vs. RSP

And what exactly are these securities? BRK.B is the famous Berkshire Hathaway of Warren Buffett; RSP is the Guggenheim S&P 500 Equal Weight ETF. In other words, there are no investment geniuses working at Guggenheim on the RSP ETF. All that they do there is make sure that every year the fund has approximately the same amount of money invested in each of the S&P 500 stocks. That of course is the antithesis of "stock picking".

Mr. Buffett has recently said that it's difficult for him to replicate his returns of prior decades due to the size of his company's balance sheet (Berkshire Hathaway is a C corporation, not a fund). But then again it could be regime change. And the wires (fibers?) are busy now with stories of hedge-fund managers throwing in the towel because "fundamentals" aren't working any more and things are too scary. See this post for one discussion of that.

© 2017 Michael C. O'Connor ∅ All Rights Reserved