Active portfolio management

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:

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Summary of Gurufocus research on Buffett-Munger style investing

Investors are always looking for a system to achieve higher returns with less risk. How to find such a system? Why not start by looking at what one of the world’s greatests investors, Warren Buffett has been doing for many years? Buffett has said many times that he likes to buy companies with the following characteristics:

  1. Simple businesses that he understands
  2. that have predictable and proven earnings
  3. with economic moat
  4. which can be bought at reasonable prices.

The people at Gurufocus have tried to convert the last 3 characteristics in rules for investing, thus creating a system. They also conducted a back test study of parts of their system and also the system as a whole over the period between 1998 and 2008. In this post, I will give a summary of their publication. The original articles can be found here:


Buffett-Munger style investing means buying stocks of great companies at good prices. (Actually Buffett also invests in different ways, like buying companies outright, but this is not possible for the average investor. Also he invests in other securities like bonds, but this is not the focus of this post.) Good companies will continue to increase their earnings per share in the future and the stock value will eventually increase to reflect the growing earnings (in the long the stock market is a weighing machine). If the stock can be bought at good prices, you have now found a good investment. We are searching for a system to help us find Buffett-Munger type investments. The system should work in all markets to help us find investment which have a high potential return while simultaneously having a low risk for permanent loss of capital. That is, it should follow Buffett’s rule number 1: ‘Never lose money’. The 2008/2009 recession is a great period to test the system, since if the system contains fundamental flaws, these will probably be exposed in this crisis.

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