I was reading in the Globe and Mail recently about how Warren Buffett was buying back billions of dollars’ worth of his company’s own stock these days. For those of you that are only vaguely familiar with the Oracle of Omaha, he’s sort of seen as the most successful stock investor/stock picker of all time. He’s famous for being able to look at companies’ bank sheets and determine which ones are undervalued enough that they represent a good buying opportunity. Then he buys as much of the stock as he can get his hands on, and these days he often just buys prospective companies outright. His holding company (a name for a business that basically owns other businesses) is called Berkshire Hathaway and it has done pretty well for itself over the years. His compounded rate of return over the last 4+ decades is over 20% (surpassing the market average by a HUGE margin). This consistent growth is extraordinary in so many ways.
Luck vs Skill
Many indexing disciples (of which I proudly consider myself one of) out there believe luck has played a large part in Buffett’s success. I think this is true to some degree. I think there are many reasons why Buffett has experienced the level of success he has, and many of those reasons are advantages that the average retail consumer like myself can never hope to duplicate – but that is a whole other discussion. The bottom line here in my mind is that IF you believe someone out there can pick stocks and beat the market over time, then Buffett and his partner Charlie Munger should probably be your first two picks.
The Losses Aren't Mutual (the Manager Doesn't Partake)
Given that premise, why in the world would you ever invest in mutual funds? Investing in Berkshire Hathaway means that you are getting a huge management team to look after your money, but more importantly a management team headed by the most successful manager of all time, who believes so strongly in the investments he’s putting your money into that he put his own money in alongside of yours. Are you ever going to get a better guarantee than someone putting their own skin in the game?
If all of that isn’t enough for you, then consider the difference management fees will make over the long haul when it comes to your investments. I’m a big proponent of Canadians becoming more aware of MER fees and massive difference they can make in your investments over time. I’ve pointed out (to the chagrin of many investment advisors) several times the basic math behind the tens of thousands of dollars the average Canadian will likely lose in their life to mutual fund fees if that’s the vehicle they chose to primarily invest through. Just for reference-sake, I saw a commercial on an American TV channel last week that said the average American loses 155K in fees from their 401-K during their lifetime. I imagine the results would be somewhat similar here in Canada. Investing in BH takes away those pesky fees that eat away at your savings’ growth over the years.
If They're Good Enough for Buffett…
Finally, maybe the best argument for buying Berkshire shares right now is that Warren Buffett himself is buying them. As the G&M article pointed out, Buffett is buying back shares of his own company, even though he hasn’t done so in the past – simply because he feels they are such a great value at their current stock price. The company currently has a huge pile of cash on its balance sheet and in Buffett’s own words, he is just waiting to pull the trigger on another attractive deal. Even if the old investing wizard is only half as good as he has been over the past five decades, you’ll still be getting a better deal than you would be with 98% of mutual funds out there these days!