As Warren Buffett’s Alpha Goes Down, The Value of A Lunch With Him Goes Up

Warren Buffett is one of the best investors of the past 60 years- probably the best (I haven’t made up my mind whether Jim Simons, who started investing at a late age, is better than he is). His track record for the first 50 years of his investment career is absolutely amazing. Unfortunately, for the past 5-10 years his alpha went down to zero from around 10-12 percent per year. We calculated Warren Buffett’s alpha for 5 and 10 year rolling periods using Carhart’s four factor model. Carhart’s model tries to dissect returns into four compartments: market return, size effect, value effect, and momentum effect. Whatever isn’t accounted for by these four factors shows Warren Buffett’s alpha. Carhart’s model correctly shows alphas of nearly 20% per year in the late 70′s and early 80′s, and 10+% in the 90′s. However, Warren Buffett’s alpha started to decline below 10% in the mid-90′s and pretty much went down to zero for the past 5-10 years.

hedge funds vs. mutual funds

One reason for Buffett’s relatively poor performance is Berkshire’s size. He can’t make enough of the big bets that will have a significant impact on his performance. He is also reluctant to make a lot of transactions because he doesn’t want to turnover in his portfolio, leading to taxes. He probably pays less in taxes than his secretary does. As a result, he pretty much has the same stocks in his portfolio as he had 10 years ago. He doesn’t pay the 15% capital gains tax but he doesn’t get to invest his money in better stocks either. Another reason is that there used to be a “Warren Buffett premium” in Berkshire’s stock price, now it turned into a “Warren Buffett discount”.

Warren Buffett’s performance is worsening at the same time the price people are willing to pay to have lunch with him is skyrocketing. Here is a table showing the price of a lunch with Warren Buffett:

Year Price Winner
2000 $25,000 Anonymous
2001 $18,000 Anonymous
2002 $25,000 Anonymous
2003 $250,001 David Einhorn
2004 $202,100 Jason Choo
2005 $351,100 Anonymous
2006 $620,100 Yongping Duan
2007 $650,100 Mohnish Pabrai, Guy Spier, Harina Kapoor
2008 $2,110,100 Zhao Danyang
2009 $1,680,300 Salida Capital
2010 $2,626,311 Anonymous

The price was extremely low between 2000 and 2002. If that were the price today, Insider Monkey would have paid it in a heartbeat and have the best advertising ever for a start-up finance website. David Einhorn was the first one to notice the real value in a lunch with Warren Buffett and paid 10 times more than the going rate just a year earlier. In 2003, Warren Buffett still had a tremendous track record, so it made sense to pay $250K. Unfortunately, we don’t think it’s worth $2 or $3 Million just to have lunch with Warren Buffett anonymously. Although it may still make sense if you are trying to advertise your fund or business, or to show people that you have $3 Million to blow off. One thing is clear. As Warren Buffett’s investing record made a turn for the worse, people’s appetite to pay big bucks skyrocketed.

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