Warren Buffett Is One Stock Picker Who Believes He Can Still Beat the Market

By Nicole Friedman 

Warren Buffett was dismissive of professional money managers in his widely read letter to Berkshire Hathaway Inc. shareholders. But the billionaire reasserted his belief in his own ability to pick winners and losers.

"Every decade or so, dark clouds will fill the economic skies, and they will briefly rain gold," he wrote in the letter, which was released Saturday. "When downpours of that sort occur, it's imperative that we rush outdoors carrying washtubs, not teaspoons. And that we will do."

The prediction that Berkshire would be ready to profit from the next downturn was one of several active-management assertions from the 86-year-old investor, who became one of the world's richest people due to bets on cheap stocks and companies. Mr. Buffett signaled a willingness to sell longtime Berkshire holdings and declared Bank of America Corp. to be undervalued.

It is an approach that is no longer in vogue in the asset-management world as investors seek out cheaper funds that mimic market indexes while retreating from managers who promise to beat the market. Investors pulled a net $342.4 billion from U.S.-based actively managed funds last year, according to Morningstar, while pouring a record $505.6 billion into U.S.-based passively managed funds.

Mr. Buffett himself recommends that investors use low-cost index funds rather than placing their money with active managers that charge higher fees. More than $100 billion, he said in his letter, has been wasted on bad investment advice over the last decade. He also declared victory in a $1 million bet with another asset manager that an S&P 500 index fund would outperform a basket of hedge funds over a 10-year period.

"He's certainly not saying that there are no...Warren Buffetts out there, " said Roger Lowenstein, author of a biography of Mr. Buffett and a director at mutual fund Sequoia Fund Inc. "What he's saying is that the average investor is not going to do better than average."

Mr. Buffett is one of the world's most successful active managers. From 1965 through 2016, Berkshire's market value rose at a compounded annual gain of 20.8%, compared with 9.7% for the S&P 500 including dividends. Berkshire doesn't pay dividends -- another sign of Mr. Buffett's confidence in his investing abilities.

Berkshire now owns so much that its overall holdings, which include retailers, utilities and manufacturers, are often seen as a proxy for the overall U.S. economy. Its 2016 financial results, which were also released Saturday, revealed that certain industrial businesses are slowing.

Berkshire reported that its earnings for the year were basically flat -- $24.07 billion, compared with $24.08 billion in 2015. That was largely the result of disappointing results for its railroad, which struggled due to slowing demand for coal.

Berkshire's book value, a measure of assets minus liabilities that is Mr. Buffett's preferred yardstick for measuring net worth, rose 11% in 2016. But that was less than the 12% total return in the S&P 500, including dividends.

Berkshire's huge insurance operations and investments did well, helping to offset weakness in its industrial operations.

Within Berkshire, Mr. Buffett has doubled down on his actively managed approach. Berkshire hired two investment managers, Ted Weschler and Todd Combs, who rely on the same value-oriented, long-term approach that Mr. Buffett uses. Messrs. Weschler and Combs are expected to take over management of Berkshire's entire portfolio once Mr. Buffett steps down.

Berkshire has long profited from Mr. Buffett's willingness to hold some stock positions, including Wells Fargo & Co., American Express Co. and Coca-Cola Co., for years without selling them. But he noted in the letter that anything could be up for sale, raising questions among some Berkshire followers about whether a meaningful holding could be under scrutiny.

"It is true that we own some stocks that I have no intention of selling for as far as the eye can see," he wrote. "But we have made no commitment that Berkshire will hold any of its marketable securities forever."

Berkshire bought large stakes in Apple Inc. and four major U.S. airlines in 2016, all of which have risen in recent months. The holdings came as a surprise, because Mr. Buffett has previously shunned technology stocks and criticized airlines as losing investments. The company also sold most of its stake in Wal-Mart Stores Inc. last year.

In another signal of his active-management approach, Mr. Buffett singled out one holding, Bank of America, for praise and said Berkshire would convert its preferred Bank of America shares to common shares if the bank raised its dividend enough.

While Mr. Buffett remains active in his stock picking, Berkshire's stock portfolio has grown less important to its overall performance as he has added more companies to the conglomerate.

"Berkshire is no longer primarily in stocks," said Lawrence Cunningham, a law professor at George Washington University who has written about Berkshire. "What...readers can learn from Warren these days is less about value investing and stock picking than about corporate culture and management organization."

(END) Dow Jones Newswires

February 26, 2017 19:22 ET (00:22 GMT)

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