Warren Buffet is a household name to many that embodies investment wisdom. He has been a pillar of buy and hold investing for more than 30 years. Buffet is a likeable, grandfatherly person who has made a number of quotable statements:
“[Our] favorite holding period is forever. We are just the opposite of those who hurry to sell and book profits when companies perform well but who tenaciously hang on to businesses that disappoint.”
“A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful.”
“Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.”
“Every decade or so, dark clouds will fill the economic skies, and they will briefly rain gold.”
Buffet operates via a publicly traded company, Berkshire Hathaway. So how would an investor do who purchased Berkshire Hathaway stock over time versus a portfolio made up of passively managed mutual funds?
The second portfolio is a combination of a large growth index fund and a small cap value mutual fund. The percentage allocation was based on choosing the efficient frontier as of December 1999. The efficient frontier creates an optimal balance between investments based on either future predicted returns of historical returns. In this case I used the historical performance from 1972-1999 to create an optimal mix of the two funds that works out to 56% Large Cap and 44% Small Cap Value. This way we don’t get any benefit from knowing the next 20 years.
Accumulation Years: 2000-2019
In the year 2000 tech stocks were the rage and the market was at one of its highest valuations ever. What if we started investing at that point, putting $500 per month away into one of the two portfolios for 20 years and adjusting our contribution up for inflation?
Portfolio 1: Berkshire Hathaway
As of the end of 2019 you would have accumulated $438,357. This is not bad considering you had to endure the Dot.com selloff, the Great Recession of 2008, and many other smaller corrections and selloffs.
Portfolio 2: 56% Vanguard Growth Index and 44% DFA US Small Cap Value
As of the end of 2019 your total accumulation is $437,185.
So either one of these portfolios was a very effective tool for building wealth.
Retirement on Buffet or Mutual Funds? 2000-2019
In this next analysis, we take a withdrawal of $416 per month adjusted each year for inflation from an account valued at $100,000 initially. How did we do?
Portfolio 1: Berkshire Hathaway
Our simple Buffet portfolio ends the 20 year period with a balance of $243,135. Berkshire’s low exposure to tech stocks in the Dot.com era did wonders for this portfolio.
Portfolio 2: Large Growth/Small Value
The two asset portfolio ends the period with a balance o $86,035. This portfolio still has a chance to make it to 30 years, but it is definitely at risk of zero balance in the next decade. The Dot.com selloff was very damaging to a US only portfolio that was heavily weighted to growth stocks. This is the danger of optimizations based on history. Higher returning assets will get weighted a heavier amount at the wrong time.
