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Warren Buffett vs. Allen Iverson

Warren Buffett was an amazing investor. His alpha was around 20% when he was running his partnerships. Berkshire Hathaway also managed to generate a 10+% annual alpha until 2000. Unfortunately for the past 10 years Warren Buffett’s alpha went down to zero. (See how to calculate alpha and beta)

hedge funds vs. mutual funds

Warren Buffett underperformed the market in 2010 as well. His equity portfolio underperformed the SPY and his best stock picker, Lou Simpson, retired at the end of 2010. This is what Buffett wrote in 2010’s annual letter about his performance:

“The per-share book value of both our Class A and Class B stock increased by 13% in 2010. Over the last 46 years (that is, since present management took over), book value has grown from $19 to $95,453, a rate of 20.2% compounded annually.”

Do you have any idea what he wrote in 1998’s annual letter about his performance? Check it out:

“Our gain in net worth during 1998 was $25.9 billion, which increased the per-share book value of both our Class A and Class B stock by 48.3%. Over the last 34 years (that is, since present management took over) per-share book value has grown from $19 to $37,801, a rate of 24.7% compounded annually.”

So, during the first 34 years Warren Buffett managed to increase Berkshire’s book value by 24.7%. Over the last 12 years the annual increase in book value was only 8.3%. You don’t hear about this in his annual letter. This isn’t much different from Allen Iverson bragging about his 26.7 points per game career performance. We know, Warren Buffett was a great investor when he was younger. We also know that Allen Iverson was a great basketball player when he was younger. Unfortunately, Iverson doesn’t have any alpha anymore either. He couldn’t compete in the NBA, so he had to go to Turkey to play in the Turkish Basketball League. It’s time for Warren Buffett to pick a real successor or successors who could beat the market by a large margin. There are several hedge fund managers who beat the market by 15+ percentage points during the past decade by investing conservatively. Julian Robertson’s Tiger cubs collectively manage more than $100+ Billion and as a group they have been performing spectacularly. Warren Buffett should follow suit before it’s too late.

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