Last week, I was reading the letters Warren Buffett wrote to the partners of his Buffett Partnership Limit (BPL) between 1957 and 1970. In these letters he stresses over and over that the goal of BPL is to outperform the Dow Jones index (DJ; Dow) by as a high a margin as possible and with as low risk as possible over periods of at least 3, but preferably 5 years.

Buffett stresses that for both professional money managers and individual investors, measurement is key: how do your investment results compare to the benchmark? Also, he shows that it is very difficult to outperform the index, even if you are very smart, work very hard, have integrity, etc.

The records of Warren Buffett, George Soros, Peter Lynch, John Templeton, and others have shown that it is possible to outperform the market over longer periods of time. The article written by Warren Buffett in 1984 titled ‘The Superinvestors of Graham-and-Doddsville’, has shown clearly that this is the case, so the market is definitely not efficient all of the time.

But how difficult is it to beat the market? I decided to compare the results of some well-known investors today, with some benchmarks to see whether they outperform and if so, by how large a margin.

This article will first look at mutual funds investing only in the US, then it will look at mutual funds investing globally. After that, a comparison will be made with formula investing, and finally there will be a discussion.

Mutual funds investing only in the US

The table below (click on the picture to go to the Google Spreadsheet) shows the 10 year records (period between 18 August 2000 and 13 August 2010) of some well-known funds compared to the S&P 500 index. The results are sorted on their results (descending).

A period of 10 years has been chosen, since investment results should not be viewed over the short term, because plain luck can play a large role over the short term. Also risk is not properly accounted for: had you invested in dot com and telecommunications stocks in 1999 and 2000 (especially if you had used leverage), you would have done very well during that period, but you would have had enormous losses in 2001 and later. What is the point of having huge gains and then losing it all?

Some remarks with regards to the table and the data:

Continue reading →