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The Actuary The magazine of the Institute & Faculty of Actuaries

Warren Buffett triumphs again

In my article ‘Investment of the third kind’ (April 2003) I pointed out that the very good performance of my approach from 2000 onwards was in part a recovery from the poor performance in 1999 when the worldwide speculative bubble in ‘new economy’ stocks was inflating. I also drew parallels with the performance of Warren Buffett’s company, Berkshire Hathaway, where the phenomenal long-term record of book value per share growth smoothes out the inevitable periods of ‘irrational exuberance’ when stockmarket prices detach themselves from any sane appraisal of underlying value.

The 2002 annual report of Berkshire Hathaway (in which I am a shareholder) makes fascinating, but not totally unexpected, reading. Over 2002, book value per share increased by 10%, as against a total return on the S&P500 of –22%. While Buffett describes the magnitude of this 32% outperformance as ‘aberrational’, the underlying message is clear. A highly disciplined long-term value approach, as first propounded by Benjamin Graham, the subject of Sos Green’s article ‘The dean of Wall Street’ in the March 2003 issue, will triumph handsomely over the medium and long term.

How much longer must we give credence to theorists who not only preach that ‘price is always equal to value’ but also construct esoteric investment models predicated on this obviously flawed premise?