Berkshire Hathaway Inc. (BRK.A), Cisco Systems, Inc. (CSCO): Warren Buffett Is Not a Myth

Page 1 of 2

Over on MarketWatch, a site run by the Wall Street Journal, Paul Merriman recently published an article entitled Warren Buffett: More myth than legend. With a bombastic title like that it’s no surprise that the article is one of the most viewed on the site. The main argument of the article is this: over the last 15 years Berkshire Hathaway Inc. (NYSE:BRK.A), Warren Buffett’s company, has seen its stock rise at a lower rate than a group of value orientated funds. The author says this:

For my money, I have to wonder whether Warren Buffett is as good as he is made out to be. If his management really “adds value” to value investing, why don’t his results at least equal the performance of passive value index funds?

In making this argument the author forgets one very important thing.

Berkshire Hathaway Inc.

Stock performance and company performance are not the same

In Warren Buffett’s annual letter to shareholders the Oracle of Omaha stresses that the book value per share is the most useful, albeit imperfect, measure of the underlying value of Berkshire Hathaway Inc. (NYSE:BRK.A). Since the beginning of 1998 Berkshire Hathaway Inc. (NYSE:BRK.A)’s book value per share has increased at an annualized rate of about 9%, outpacing half of the value funds mentioned in the article. Of course, comparing Berkshire Hathaway Inc. (NYSE:BRK.A) to an emerging market ETF is a bit dubious to begin with.

The author claims that the stock has risen at an annualized rate of just 5.3% in the 15 years ending on June 30, 2013, and that’s true. But choosing arbitrary time periods for comparing investments is a deceptive practice. If instead you look at the time period between Jan 1, 1998 and Jun 30, 2013, beginning six months before the article’s time period, the annualized return for the stock was a far higher 8.9%. Why so different? Because the author happened to choose a beginning date which came immediately after a huge run up in the share price.

If you listened to Buffett and used the book value as a guide to the value of the company you would have never bought shares after that run up. Here’s why:




BRK.A Price / Book Value data by YCharts

The price/book value was at historic highs. The stock has done poorly during this arbitrary time period simply because it was overpriced in the beginning. If the author had chosen a 20 year window instead of a 15 year window the annualized return during that time would have been 12.3%.

When a slight change in the time period used completely changes the results it’s pretty clear that the argument is nonsense.

Another example

Networking giant Cisco Systems, Inc. (NASDAQ:CSCO) is another good example of confusing stock performance and company performance. The stock has been essentially flat over the last decade, trading within a range between $15 per share and $30 per share for much of the time.



CSCO data by YCharts

This had led many to declare that since Cisco Systems, Inc. (NASDAQ:CSCO) stock hasn’t done anything in the last decade it will surely do nothing in the next. Those people often assume that the company has done poorly over the last ten years.

Page 1 of 2
blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

On the Move: The 10 Fastest Growing Businesses in 2015

Fast Money: The 10 Highest Paying Fast Food Restaurants

Mixing It Up: The 14 Best Music Mashups of 2014

Rito Pls Buff: The 10 Least Played Champions in LoL Season 4

10 Covers of Popular Songs that are Better than the Originals

Must See TV: The 9 Most Anticipated Shows of 2015

The 15 Biggest Box Office Bombs of All Time

10 Things The World Can’t Stand About Americans

Picture Perfect: The 6 Smartphones with the Best Cameras

The 10 Best Countries To Work In the World

A Profitable Day At The Track: 5 Tips For Betting On Horses

Tearing You Apart: 6 Bad Habits That Ruin Relationships

Learning on the Job: The 6 Biggest Mistakes Parents Make

Shopaholics Rejoice: The 12 Biggest Malls in the World

Fright Night: 10 Horror Movies Based on True Stories

Mach Mania: The 10 Fastest Jets in the World

Military Heavyweights: The 10 Countries with the Most Tanks

All In: The 7 Richest Poker Players in the World

Abracadabra: The 10 Best Magicians in the World

The 10 Richest Asian Countries in the World in 2014

Eyes in the Sky: 10 Things You Need to Know About Drones

Rising Stars: The 6 Best Silicon Valley Startups

Military Muscle: The 5 Most Advanced Armies in South America

All that Glitters: The 7 Most Luxurious Jewelry Brands in the World

5 Things You Didn’t Know About ISIS but Should

Empowering Your Money: The 5 Best Energy Stocks to Invest In

The 11 Best Android Apps You Can’t Get on iOS

The 10 Most Important International Conflicts in 2014

Mood Enhancers: The 20 Most Uplifting Songs of all Time

Lover Beware: The 8 Countries that Cheat the Most

Breath of Fresh Air: The 25 Countries with the Best Air Quality on the Planet

Singles Beware: The 8 Worst Mistakes Made on First Dates

Healthy and Happy: The 10 Countries with Lowest Healthcare Costs

The 6 Best Company Team Building Activities to Build Workplace Camaraderie

Ships Ahoy: The 10 Busiest Shipping Ports in the World

10 Productivity Tips to Save You Time and Help You Do More With Less

Grab a Bite: The Most Popular Fast Food Restaurants in America

Friday Night Thirst: The 10 Most Popular Cocktails in the World

The 6 Greatest Unsolved Mysteries We May Never Figure Out

7 Useless Products You Never Should’ve Bought

The 5 Reasons Why You’re Single and Miserable

The 7 Most Addictive Foods in the World We Can’t Stop Eating (Even Though We Should)

5 Amazing Places You Can Swim with Dolphins

The Top 7 Most Livable Countries In The World

The 10 Most Expensive Baseball Cards Ever Pulled From A Pack

The 5 Easiest Second Languages to Learn for English Speakers

Silver Spoon: The 6 Richest Families in the World

The 20 Countries with the Largest Prison Populations in the World

The Top 10 Richest Actors in the World

The 10 Best Airline Stocks to Invest In Before They Fly Too High

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!