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Warren Buffett Should Talk To Ted Weschler about Optical Cable Corp (OCC)

One of Berkshire Hathaway’s investment managers, Ted Weschler, disclosed a 5.25% stake in tiny Optical Cable Corp (NASDAQ:OCC). It’s time for Warren Buffett to have a serious talk with Ted Weschler. By this time we all know that hedge funds can’t outperform passive index funds. Warren Buffett famously won a bet against fund of hedge funds and he has been very vocal about this. “Consistently buy an S&P 500 low-cost index fund. I think it’s the thing that makes the most sense practically all of the time. The trick is not to buy the right company, the trick is to essentially buy all the big companies through the S&P 500 and to do it consistently” he told CNBC.

If Buffett is right about low-cost index funds, why is Ted Weschler, a former hedge fund manager, investing in a small company? Ted Weschler is expected to manage a significant amount of Berkshire Hathaway’s portfolio after Buffett retires, so it is really critical that Weschler understands that diversification and investing in low-cost index funds makes the most sense practically all of the time. Unless of course there are times when the expected returns in a given company is much higher than the risk you are taking. Given that Weschler paid around $3.5 to $4 per share for his 404 thousand share stake in Optical Cable Corp (NASDAQ:OCC) and the shares currently trade at $6.15, maybe this is one of those “unpractical” times.

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The truth is that Warren Buffett himself doesn’t listen to his own advice. He can pick the right stocks, his investment managers can pick the right stocks, but your average Joe Schmuck can’t. Warren Buffett is extremely good at investing but he rarely makes the list of our 100 best performing hedge funds list. This means there are hundreds of other fund managers who can not only beat the market but also beat Warren Buffett. You might think that it is just coincidence that a hedge fund manager can beat Buffett in a given quarter and the same fund manager can’t consistently beat him.

Think again. Our flagship best performing hedge funds strategy invests in the best ideas of these fund managers every quarter. This strategy returned 121% since its inception in May 2014 through the end of August. S&P 500 ETF (SPY), a low-cost index fund, returned 66.7% during the same period. Warren Buffett’s Berkshire Hathaway (BRK-B) returned 65% during this same period as well. So, maybe investors should really listen to Warren Buffett and dump Berkshire Hathaway’s stock and instead invest in our best performing hedge funds strategy.

David Einhorn
David Einhorn
Greenlight Capital

Here is what we, including Buffett, really know about investing. There are a lot of opportunities in the small-cap space and if you do your work, you can identify stocks like Optical Cable Corp (NASDAQ:OCC) and outperform the market by a large margin. Buffett himself bragged that fact in 1999:

If I was running $1 million today, or $10 million for that matter, I’d be fully invested. Anyone who says that size does not hurt investment performance is selling. The highest rates of return I’ve ever achieved were in the 1950s. I killed the Dow. You ought to see the numbers. But I was investing peanuts then. It’s a huge structural advantage not to have a lot of money. I think I could make you 50% a year on $1 million. No, I know I could. I guarantee that.”

 

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