Buffett Beats the S&P 500... and Top Money Managers

by Mark Skousen
Poker_Chips

"You can win a horse race, but you can't beat the races."

- Jesse Livermore

"It is easy to determine that Warren Buffett's performance was due to his skill in picking stocks. But for more mortal portfolio managers, it is extremely difficult to determine with any degree of confidence whether the superior returns of money managers are due to skill or luck."

- Jeremy "The Wizard of Wharton" Siegel

At Berkshire Hathaway's annual shareholders meeting this year, Warren Buffett reported on a 10-year, $1 million bet he had with a group of hedge fund managers.

Protégé Partners chose five top money managers who it argued could beat the market from 2008 to 2017... while Buffett bet that an investment in the unmanaged S&P 500 Index Fund would do better.

The results are in... and they're "an eye-opener," as Buffett says.

Below is the annual blow-by-blow from the battle of the Titans. I've added a third column showing Berkshire Hathaway's (BRK-A) stock performance during this 10-year period.

10-Year Investment Performance

There are three remarkable takeaways from this bet.

First, money managers seem to do a decent job of protecting investors only during a bear market.

Second, during a bull market (nine out of the past 10 years) the money managers failed miserably to keep up with the S&P. As Buffett commented, "The roof fell in."

Third, Buffett's own managed fund, Berkshire Hathaway, outperformed both the money managers and the market index. If he had bet against the index, he would have won (though not by much.)

His investment company outperformed the index in seven out of 10 years.

Gold Bugs Beware

Another highlight from this year's shareholders meeting was the story of an investor from San Francisco who used to speculate in penny mining stocks. His wife talked him into investing in Berkshire Hathaway stock instead.

It was a good move. Penny gold stocks have been a disastrous investment over the long run compared with Buffett's investment company.

As Buffett himself noted last weekend, "If you had bought gold at the time of Christ and you figure the compound rate on it, it's a couple tenths of a percent."

Meanwhile, investing in successful businesses offers the potential of multiple returns. As Buffett himself noted, "Just since 1942, an investment of $10,000 in an index of U.S. stocks would be worth $51 million today!"

An Incredible Money Machine

No doubt Berkshire Hathaway has been a big success. In fact, it's done substantially better than an index fund most of the time.

If you had invested $10,000 in 1964 when Buffett took over, your investment would be worth $160 million today.

If you had invested $10,000 in 1990, it would be worth $45 million today.

That's a big "if" - it assumes you stayed fully invested the entire time. Investors are always tempted to take profits along the way.

For some time now, Buffett has warned his shareholders that his conglomerate firm is too big to beat the market, so an index fund is more suitable. Someday he may be right.

Meanwhile, I'm still betting on Buffett's skills as a money manager.

Good investing,

Mark Skousen

Thoughts on this article? Leave a comment below.

Horton Hears a Homebuyer

In the classic Dr. Seuss story Horton Hears a Who!, Horton the elephant becomes the protector of a community the size of a speck of dust. The Horton we're talking about today actually builds life-sized communities.

Chief Investment Strategist Alexander Green just added Texas-based residential builder D.R. Horton (NYSE: DHI) to his True Value Alert portfolio. Here's what he said about it on Monday...

The Fed's tightening has hit a lot of interest-rate-sensitive investments over the last six months, including bonds, utilities and real estate investment trusts.

Among the least deserving are homebuilders.

All signs show that residential real estate is still healthy in this country.

And that means the profits of major homebuilders are likely to push higher - along with their shares - in the weeks ahead.

So let's take a look at a company we've traded profitably before: D.R. Horton (NYSE: DHI).

Based in Fort Worth, it is the largest residential homebuilder in the U.S., with operations in 26 states under the names D.R. Horton, America's Builder, Express Homes, Emerald Homes, Freedom Homes and Pacific Ridge Homes.

The company builds single-family homes, duplexes, town houses and condominiums marketed primarily through independent real estate brokers. It also originates and sells mortgages, as well as title insurance policies and other closing services.

The spring homebuying season is now well underway. And with the unemployment rate at its lowest level in 17 years, a lot of folks are out looking - and buying.

Of course, the vast majority of homebuyers take out a mortgage. So higher rates do make home ownership more expensive.

That's why the S&P Composite 1500 Homebuilding Index has declined 17% from its January 22 peak.

Yet financial comparisons with last year's numbers look good.

In the March quarter, for instance, D.R. Horton's pre-tax earnings jumped 26% on a 13% increase in sales.

Profit margins were up. And with 29,400 homes in inventory and more than a quarter-million lots owned and controlled, it is well-positioned for the rest of the year.

Meanwhile, the stock is inexpensive at 16 times earnings (and less than 10 times prospective earnings), 1.1 times sales and two times book.

You'll also collect a 1.11% dividend yield here.

The housing market is a major indicator of the strength of the economy. When people are confident about the future, they are more inclined to buy a new home.

Especially with buyers - and their realtors and mortgage brokers - well aware that interest rates will be only higher in the future.

With business and consumer confidence high and joblessness at a 17-year low, the outlook for the nation's largest homebuilder looks promising indeed.

- Donna DiVenuto-Ball with Alexander Green

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