As Berkshire Hathaway’s Warren Buffett prepares to retire, most tributes focus on his reputation as the world’s greatest stock-picker. (Disclosure: I own shares in Berkshire.)
However, the truth is more nuanced.
Buffett made many brilliant investments, but it wasn’t all plain sailing. The last decade saw some expensive missteps, like Kraft Heinz, Precision Castparts, and a $4 billion loss on airline stocks.
One pick – Apple – made all the difference. Without that position (largely credited to Berkshire’s Todd Combs), the Market Sentiment blog notes that Berkshire would have “significantly lagged” the S&P 500 over the past 10-year and 20-year periods.
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It’s hard to isolate the performance of Buffett’s stock picks, but in 2018 Discipline Funds founder Cullen Roche estimated that they lagged the S&P 500 by about 2 per cent annually over the prior decade, suggesting Berkshire’s private businesses did much of the heavy lifting.
Buffett’s real edge was access to stable, long-term capital. Thanks to the steady float from Berkshire’s insurance businesses – premiums collected up front and paid out later – he could invest with low-cost, low-risk leverage.
A widely cited paper by AQR Capital Management found his performance largely reflected exposure to high-quality, low-risk, value stocks, amplified by leverage (around 1.6:1) and disciplined execution over decades.
Buffett often urged ordinary investors to stick with index funds. That was good advice. His success wasn’t just about picking stocks: it was about building an investment vehicle few could ever hope to imitate.
