Warren Buffet style investing
Curious to know why more people don't engage in the style of value investing. There are so many shops focused on quarter results. From what I understand, Warren buffet is one of the best if not the best investor that has ever lived. Is there anything that I am missing on his investing style, whether if it is no longer applicable at scale or is it just outdated from information flow? Could anyone explain why institutional investors would rather give money to HF like Citadel, Balyasny, and P72 over a fund that values long term holdings that generates value over time. And why aren't there more funds that are sizeable doing value investing?
Everyone wants to get rich quicker
if warren buffet were 28 and running a $50mm portfolio he would probably play in special sits, small caps, and good earnings setups not own Apple. his investing style is constricted by size. Either way, buffett isn't the right person to emulate it is guys like PTJ and druck who have not had big drawdowns and know when to go big and when to size down based on what the chart and market is telling you, not dogma over some made up DCF
Would you prefer special sits and small caps for a graduate today seeking a career in finance? Many thanks!
Problem with Buffett style investing is that you need long-term capital, Buffett only allowed redemptions once a year and he also didn’t raise much money from institutional investors, most of his LP base were individuals who knew him and his reputation. Another thing is Buffett wasn’t buying compounders at 50xP/E and his holding period was way shorter than it is today which is opposite of many value/long funds that justify buying at crazy multiples (compounder bros). Also I believe his capital base was small which allowed him to take advantage of market inefficiencies in the small and mid cap space and he wasn’t focused on managing higher AUM since he didn’t charge mgmt fees. In contrast, fund managers today want to focus on higher AUM which limits the number of opportunities available. Another thing is that many people don’t realize is that his capital was flexible, he could do anything with it, buy stocks, bonds, do arb, and even own companies privately. I believe it’s one of the reason why he outperformed since his capital wasn’t constrained to a single asset or sector.
Understood, so would it be possible to generate returns on these small-mid cap companies nowadays. I understand that he did a great amount of work with the companies that he purchased, almost amounting to more of an activist's role. Do these market inefficiency still exist or are they saturated out from the information flow.
Opportunities still exist in the market you just have to work hard to identify them. imo despite the instant information we receive now, it doesn't translate to perfect prices.
Because the Pods produce uncorrelated returns. If they want to hold a bunch of stocks long term the LPs themselves could do it free of fees. Also Buffett's investing career is almost as old as my grandparents lol idk how applicable his successes are today
would also add that Buffett record is not adjusted for factors. he was very much long quality/value/large cap last few decades which have all done well. unclear how much alpha he added ex those factors, relative to say a top PM at big 4 pod who is generating consistent spread. also buffett took on much more risk, since he had more volatile returns/lower sharpe than these PMs who don't produce big draws
Dude, what are you talking about?
The partnership years were still a 29.5% CAGR gross, 23.8% net over 12 years, with no down years. LPs don't care about factors if you have those returns.
Post that, this whole "buy and hold" strategy was only used after Berkshire increasingly became an insurance company with long tail insurance. Yeah, the returns are nowhere near as impressive as his old partnership returns, but things are different when your capital base is mostly from a highly regulated financial entity through leverage. All things considered, for a levered vehicle where he's basically paid 5% per year through the float on positive underwriting, generating S&P plus returns on that leverage and compounding over 60 years without blowing up is impressive. And that's a fee-free product with solid alpha that you can just pick up in a brokerage account vs. thinking about net returns after the massive fees you pay to the MMs.
Pods are impressive too but different game. It's not a comp.
(1) The returns of Buffett-style strategies aren't as good as you think they are.
(2) For those types of institutional investors, they have access to better returning opportunities.
(3) Human behavior isn't rational nor boundedly rational (at least if the concept of rationality is to be anything other than vacuous).
(4) Funds need to have the money over those long periods of time. There is a reason why Buffett's partnership failed, and it wasn't until after he had permanent capital that his strategy was able to pay off. It is hard to get money for public markets locked up for the longer periods of time that are needed to ensure you don't get fucked on liquidity. For example, a buy-and-hold type strategy could have a 30% net CAGR over a 20-year period, but the fund can still cease to exist if in year 10 the fund lost 50% of its NAV and the investors pulled all their money.
Decent take, but lacks a lot of nuance. First and foremost, it’s preposterous to say Buffett’s partnership “failed.” After posting stellar returns (~30% net vs Dow Jones ~8%, with minimal down years), Buffett willingly returned money to LPs because he did not find enough opportunities. This had nothing to do with the permanence of his capital; his LP’s were mostly family and friends who recognized he was a once in a generation investor and we’re happy to stay invested. Buffett’s best years were (arguably) during the partnership years, before he started using permanent insurance capital. But, his partnership strategy - which generated his best performance - was fairly different from the one that OP is familiar with.
The reason you think “Buffett-style strategies” don’t work is because many GP’s recognize the value of Buffett’s teachings and parrot his pithy quotes and timeless wisdom; but, when push comes to shove, they don’t have the skill nor temperament to replicate what Buffett did. The few funds that actually that stick to the core tenets and do well over the long term.
this is kind of was i was referring to, I realized that his investing style has changed since taking over Berkshire. It was during his partnership years where he imployed the cigar butt strat. which is what i was kind of asking, to see if there would still be opportunities to tackle in the small cap space. And if i recall correctly, after Buffett went into to these undervalued companies, if he didn't see price reflection, he would actually become more of an active investor and bring in CEOs.
I don’t know as much about Warren Wisdom’s performance history as I’d like to. Can anyone recommend reading for an analysis of the different major phases of his career and how earnings were in each? I’d like to know how returns varied during the years Charlie Monster (RIP) was by his side and also how things varied during tech boom/bust cycles since he wasn’t as heavy on tech.
read his bio "The Snowball". captures his many style shifts best. also, you realize Warren's an absolute shark and not just this nice grandpa figure that America believes in lol
Awesome comment, thank you. Sorry for the late reply. And yes, I assume he is and people are foolish to think otherwise. I coined the Warren Wisdom and Charlie Monster (R.I.P.) nicknames so that’s why I call him that. I always liked Charlie Monster way better because he was hilariously gruff and old school and seemed more unapologetically himself, even if he was out of touch sometimes. Never met either man baseline assumption has always been that they’re both sharks who take no prisoners.
I think people tend to attach Warren Buffett to factors like value and quality which I think does him a disservice. The reason he was so overleveraged to those companies was because they were cheap at the time: other investors systematically underestimated their cash flows and duration. Rather I think Buffett's approach is a lot more principles-based: only invest when you know the business very well, understand competitive dynamics and don't overpay. You can apply a Buffett style in this sense to unprofitable tech just as well as industrials trading below book value.
I think investors these days forget how shallow the average research process was in the 80s and 90s. Like imagine making all your investment decisions based only on sell-side reports (and these reports did not include any expert interviews or management commentary outside of earnings calls)
There unfortunately is not a lot of money in sitting on your ass. LPs don’t like it and the great investors don’t necessarily need to hire analyst to *do things* all day. So, the jobs are disproportionately available in the high-activity styles of investing. PE is a standard path post-banking BECAUSE there is so much work for semi-replaceable young guys to do.
Because NVDA and chill would have made you more money than some arbitrary long term valuation model.
Outside of this (and the above stuff that others reference) LP allocators are still humans that have their own career risk. Even if you can prove that over a longer horizon you will outperform, you are still sending quarterly marks to your LPs and they have bosses to answer to why Value Bros Capital partners is u/p every quarter (like value / buffet-style did for a long time in the 2010s). Greenlight just got over its HWM like a year ago and likely the only reason it survived is because a lot of their AUM is quasi-permanent capital.
To the extent that LPs are willing to lock up capital longer term, they would rather go with PE/VC/Private Credit where everyone is incentivized to kick the can down the road on negative marks which dampens perceived volatility vs. public equities.
Don't know how you can prove you can outperform over the long run
PE is leveraged, so that makes the story easier I suppose
Fundamentals and valuation are still central and the “quarter focus” thing is very misunderstood from the outside. You’re still doing the same analysis, but your are also applying/capturing those market dislocations in a different way.
Why? Among other reasons, there is not longer an abundance of glaring & simple dislocations to exploit. nor an abundance of capital eager to pay for someone to do work that’s become somewhat easy (the hard part was figuring out the concepts and then later adopting them before they were broadly understood be right.
It’s like saying why is no one playing classical music anymore? (1) they are, plenty of people play and compose classical music (2) there are a lot more capable orchestra musicians and a lot less demand to hear orchestra these days because the available varieties of music have proliferated into many other things too
Buy and hold forever just isn’t a particularly great way to deliver alpha - dislocations are narrower but more frequent than they used to be and LPs are more mindful of not paying fees for the exogenous risks over that holding period when anyone can do that. If you are investing your own money & the style suits you - you should do that. As for managing other-people’s-money, it’s hard to demonstrate luck vs skill & macro very quickly if you’re gonna make a few huge bets and ride em through big draw downs.
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