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Warren Buffett Is Wrong — Here’s Why…

Don’t get me wrong, I closely follow what Warren Buffett says and does with his money.

And yes, he’s one of the most successful investors in history — his returns over more than 60 years have made him the fourth-wealthiest person on the planet.

He is rarely wrong, but Buffett is not perfect, and a recent comment he made is, in fact, incorrect.

Let me explain…

Warren Buffett portraitThe Wall Street Journal found that Buffett made $10 billion on the investments he made at the height of the financial crisis. With characteristic humility, Buffett said, “In terms of simple profitability, an average investor could have done just as well investing in the stock market if they bought during the panic period.”

Actually, an individual investor could have done significantly better than Buffett.

To earn $10 billion, Buffett invested $26 billion. His return on investment was about 38%, or 6.7% a year over the past five years. The Journal article says Buffett made his first crisis investment in April 2008 and added to his investments throughout the crisis. He made a number of deals late in 2008 and one as late as April 2009, after the stock market had bottomed.Assuming an individual investor had $10,000 and invested one-third in S&P 500 at the close in April 2008, one-third in November 2008 and the remaining third in April 2009, an individual would have beaten Buffett. That simple strategy would have gained 74%, or 11.7% per year.

Simply put, because those three months were the months when Buffett was most active during the financial crisis, all it took to beat Buffett required investors to buy when he bought.

Buffett’s timing was, as usual, nearly perfect on his investments. But Buffett has a disadvantage compared with individual investors. He can only invest in the largest companies because he has to make large investments to have an impact on his returns. A large gain on a small investment will not increase Buffett’s wealth much in dollar terms, but that same gain could have a significant impact on the wealth of an individual who is not a billionaire.

Individual investors would have easily been able to beat Buffett’s returns over the past five years, and they should be able to beat his gains over the next five years.

In fact, following my Maximum Profit trading strategy during the financial crisis would have provided a total return of 157%, more than four times as large as Buffett’s gain. And in the past decade, the Maximum Profit system would have outperformed Buffett’s Berkshire Hathaway by 357%.

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